Growing retirement savings through a 401(k), REIT, and other investment accounts enables many people to put away a significant nest egg. Yet it’s dismaying to learn how much of a bite is taken out of those funds by taxes, especially upon transfer to an heir. In Illinois, an estate tax of up to 16 percent is applied to those valued at more than $4 million. The federal estate tax kicks in much later, only affecting those with assets of $13.99 million (individual) or $27.98 million (couple).
You can learn strategies for minimizing taxes from an experienced estate planning attorney. There are several legal options for preserving your hard-earned funds, making your estate planner a key person to consult when laws change.
Develop a Plan for Protecting Your Assets
State and federal estate taxes mentioned above make irrevocable trusts and gifting excellent options for minimizing your exposure. Keep in mind that politics can modify the exemption rate and other rules affecting such funds. Your estate attorney will stay abreast of the latest laws and regulations to keep you informed.
Your comprehensive estate plan should include:
- Will. A legally executed will names your heirs and directs the distribution of your assets. This document should be kept updated to reflect the current family members included in your estate.
- Durable Power of Attorney. Appointing a friend, colleague, or family member to manage your affairs when you’re incapacitated smooths transitions for your family.
- Advance Healthcare Directives. This document spells out your wishes for any medical intervention used during your final days.
- Revocable or Irrevocable Trust(s). Trusts are asset vehicles that preserve your estate for your heirs. A revocable trust allows you to continue using and drawing from the assets they contain. Conversely, irrevocable trusts receive ownership and control of items and accounts, taking them out of your hands. Irrevocable trusts are also generally insulated from legal action and bill collections. It is possible to have both types of trusts as well as to have a “pour over” will that moves your remaining assets into an existing trust upon your death.
Estate taxes can be substantial if assets held outside an irrevocable trust exceed the state or federal exclusion amount. Illinois’ graduated estate tax applies to amounts above a $4 million exclusion. In a simplified example, an $8 million estate (single taxpayer) is taxed at 10.4 percent of $4 million (the amount of the estate after subtracting the exclusion), for a total of $238,000 in taxes paid to the state of Illinois.
Federal estate taxes of 40 percent can take a $1.6 million bite out of an estate that’s worth $4 million above the federal exclusion amount ($13.99 million for a single or $27.98 million for a couple) unless your funds are protected.
Ways to reduce estate taxes include:
- Gifting. You can reduce the amount of your estate through legal gifts of cash to your family members or friends. In 2025 the allowable annual gift amount is $19,000 per person. The number of gifts allowed is unlimited until you reach the federal exemption amount. For instance, if your estate was valued at $6 million (before the exemption), you would be assessed a 7.2 percent tax and pay about $70,800. By gifting $19,000 to each of your four children and four grandchildren every year, you reduce the taxable amount by over $150,000 per year and your family members receive a portion of their inheritance early. Financial gifts within the allowable amounts, including a lifetime limit, do not have to be reported on taxes of the donor or the recipient.
- Irrevocable trusts. These trusts remove assets from your possession and control, including, if desired, investment accounts that continue to grow, along with the deed to your property. A trustee you appoint oversees and administers the trust. Specific types of irrevocable trusts can shield your assets from legal judgements and estate taxes.
How to Get Started Saving Money Today
An experienced estate attorney from Legacy & Life Law Firm LLC can create a comprehensive plan to protect your assets, ensuring that your family gets the maximum benefit from your hard work. Call for a consultation today and let us guide you to lower taxes and the assurance that your family will be well cared for.