Passing wealth to the next generation is a meaningful act that is best accomplished with proper planning and thorough knowledge of state and federal tax law.
An experienced tax and estate planning attorney can prevent you from making common tax mistakes that unnecessarily erode inheritances. Careful attention to details can help Illinois families when faced with federal and state-level estate taxes.
Misunderstanding Estate Taxes and Other Planning Pitfalls
It’s a common misunderstanding that estate taxes affect most Americans but they only applies to estates exceeding exemption amounts set by states and the federal government. In 2026, the federal estate tax exemption is $15 million per individual and $30 million per married couple. This means most estates owe nothing in federal estate taxes. But many Illinois residents pay estate taxes because the threshold is lower here.
How Illinois Estate Tax Works
Illinois is one of a few states that impose their own estate tax, and the exemption is far lower than the federal tax threshold. Illinois exempts only $4 million per estate. That means many families pay Illinois estate taxes but are exempt from federal estate taxes. In addition, if an Illinois estate is valued above $4 million, estate tax applies to the entire estate, not just the amount above the exemption. The graduated Illinois estate tax can reach 16 percent.
Confusing the Estate Tax with the Inheritance Tax
Illinois does not have an inheritance tax, but it is often confused with the estate tax. An estate tax is levied on the estate before assets are distributed to heirs while an inheritance tax is paid by the recipient.
Failing to Use the Annual Gift Tax Exclusion
Many use wealth transfer during their lifetimes to reduce their estate’s tax burden. The IRS allows individuals to give away $19,000 to each of any number of individuals per year without triggering a gift tax. Couples may double that amount. It is a simple and effective way to reduce the probability of estate taxes upon death.
Being Unaware of the Generation Skipping Transfer Tax
Some families decide to skip a generation and pass wealth directly to grandchildren or great-grandchildren. In doing so they may encounter the Generation Skipping Transfer Tax (GSTT), a separate federal tax imposed on such transactions. This tax has the same exemption threshold as federal estate tax.
Error in Step Up Basis Calculations
An often-overlooked benefit of estate planning is understanding the step-up in cost basis. It resets property valuation to the fair market value at the date of the owner’s death. This means that appreciated assets, including a family home or long-held stocks, may pass to heirs with little or no capital gains tax liability if sold shortly after inheriting. It’s financially more beneficial than gifting highly-appreciated assets during their lifetime, which results in a larger capital gains tax bill when the asset is sold.
Not Updating Beneficiary Designations
Retirement accounts and life insurance policies pass to beneficiaries outside of a will, bypassing probate court and estate planning. It is imperative to periodically check and update beneficiary designations or run the risk of assets being tranferred to ex-spouses or deceased relatives. In addition, not assigning any beneficiary can complicate the legal implications for surviving family members.
Not Working With a Qualified Professional Estate Planner
Illinois estate and tax law is complex, making a trusted attorney from Legacy & Life Law preferable to generic financial advice. For optimal results, consult a trained tax attorney who understands a family’s assets, family structure, and estate tax exposure. This is critical to reducing liabilities through coordinated planning. Call for a consultation today.