Estate Tax Planning Strategies for Illinois Residents

For Illinois residents, estate planning involves more than choosing beneficiaries. With one of the few remaining state-level estate taxes in the country and a relatively modest exemption, it’s important to plan ahead. Illinois’s estate tax can reach up to 16%, and when combined with federal estate tax rules, the total tax exposure could significantly impact the assets you intend to pass on.

With the help of professional advisors, you can build comprehensive financial strategies, including estate plans designed to manage taxes, preserve wealth and achieve long-term goals. Here’s what Illinois residents should know about current laws and what steps may help reduce estate taxes in the future.

UNDERSTANDING ILLINOIS’S ESTATE TAX

For Illinois residents, estate taxes can have a meaningful impact on the assets passed down to future generations. In 2025, estates valued over $4 million may be subject to Illinois’s estate tax. While that threshold may seem high, it’s not uncommon for individuals to exceed it once real estate, investment accounts, business holdings, life insurance and retirement savings are factored in.

Unlike the federal estate tax regime, the Illinois estate tax exemption has a cliff. If your estate surpasses the $4 million threshold, the tax applies to the value of the entire estate, not just the portion above the exemption. It will be applied on a sliding scale, with tax rates ranging from 0.8% to 16%, based on the size of the estate.

Also, unlike the federal estate tax, spouses cannot combine their Illinois exemption amounts.

Illinois does not impose its own gift tax, but lifetime gifts reduce the amount of the Illinois estate tax exemption. Lifetime gifts may also influence your federal estate tax exposure. That’s why a coordinated strategy – one that considers both state and federal implications – can be key to protecting your legacy.

THE ROLE OF FEDERAL ESTATE TAXES

In addition to state taxes, Illinois residents must also consider federal estate tax, which applies to estates exceeding $13.99 million in 2025 (or $27.98 million for married couples). 

But if your estate is even close to these limits, waiting to act could result in higher taxes and fewer planning options.

STRATEGIES TO HELP REDUCE ESTATE TAXES

Navigating both federal and state estate tax systems takes more than drafting a will. A comprehensive estate planning strategy should take into account:

• The size and structure of your estate, including real estate, investments, businesses and retirement accounts
• How to reduce or eliminate exposure to Illinois’ estate taxes
• Long-term plans to transfer wealth across generations in a tax-efficient manner

With thoughtful planning, it’s possible to help reduce your exposure to both Illinois and federal estate taxes. The right strategy can preserve more of your wealth for the people and causes that matter most to you. Here are some tools and strategies to consider.

GIFTING DURING YOUR LIFETIME

Making gifts during your lifetime can be a simple and effective way to reduce the size of your taxable estate. In 2025, individuals can give up to $19,000 per recipient annually without using their lifetime federal exemption and without impacting their Illinois estate tax exemption.

While gifts above this limit may reduce your federal and Illinois estate tax exemptions, they can still remove appreciating assets from your estate, potentially lowering future tax exposure.

USING IRREVOCABLE TRUSTS TO SUPPORT YOUR GOALS

Irrevocable trusts can provide flexibility and control, while also serving as a tool for mitigating estate tax liability. Common trust structures include:

• Irrevocable Life Insurance Trusts: Exclude life insurance proceeds from your taxable estate
• Grantor Retained Annuity Trusts: Transfer appreciating assets at reduced gift tax cost
• Qualified Personal Residence Trust: Gift a home at a reduced gift tax cost

Every trust type serves a different purpose and comes with specific considerations. An advisor can help you determine which trust strategies best support your overall estate and financial plan.

PLANNING FOR MARRIED COUPLES

Married couples face important differences between federal and Illinois estate tax laws. While federal law allows a surviving spouse to use a partner’s unused exemption (a provision known as portability), Illinois does not offer this feature.

Without proper planning, a couple could lose one spouse’s $4 million Illinois exemption. One strategy to address this is the credit shelter trust, also called a bypass trust. This type of trust can preserve the deceased spouses’ Illinois exemptions, helping reduce the overall estate tax burden when the second spouse passes.

For couples with significant assets, this kind of planning can be a key part of preserving family wealth.

MULTIGENERATIONAL WEALTH STRATEGIES

If your estate plan is designed to benefit multiple generations, certain tools can help you pass on wealth more efficiently and with fewer transfer tax consequences:

• Dynasty trusts: Structured to extend your legacy, these trusts can help keep assets in the family while limiting exposure to estate taxes over time
• Generation-skipping strategies: May allow you to transfer assets directly to grandchildren and future heirs while minimizing additional federal transfer taxes
• Family limited partnerships: Useful for organizing and managing family-held assets, FLPs may also offer valuation discounts for estate and gift tax purposes

These approaches are particularly helpful for individuals with more complex estates – such as business ownership or sizable property investments – and can play a key role in preserving wealth for future generations.

INCORPORATING CHARITABLE GIVING

Charitable planning can align your legacy with your values while offering potential tax advantages. Options include:

• Donor-advised funds: Make a charitable contribution, receive an immediate tax deduction and recommend grants to nonprofits over time
• Charitable remainder trusts: Generate income for yourself or your beneficiaries for life or a fixed term, with the remainder going to charity
• Private foundations: Build a long-term philanthropic legacy with greater control, flexibility and opportunities for family involvement

These tools can help reduce the size of your taxable estate and create a lasting impact on the causes you care about.

BUILDING A PLAN THAT WORKS FOR YOU

The complexity of both Illinois’s estate tax laws and federal rules highlight the value of careful, forward-looking planning. Whether your priorities include keeping a business in the family, providing for future generations or making a lasting philanthropic impact, having the right strategy in place can help safeguard your wealth and ensure your wishes are carried out.

At Edelman Financial Engines, our advisors can work closely with both your estate attorney and our own internal experts to help create estate planning strategies that reflect your values, support long-term goals and adapt to life’s changes. From navigating complex tax considerations to determining the future of your digital assets, we’re here to help guide you every step of the way.