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Estate Planning Tax Strategies for Federal & Illinois Taxes

Published on February 12th, 2024

Estate Tax spelled out in gold letters beside a few 100 dollar bills and a judge's gavel.

In the realm of estate planning, understanding and navigating the intricacies of estate taxes is paramount. For many in Illinois, the idea of a significant portion of their hard-earned assets being consumed by federal and state taxes is unacceptable.

It’s entirely reasonable for individuals to seek lawful methods to minimize these taxes. By doing this, they ensure that they pass on more of their estate to their chosen beneficiaries. In this blog, we explore several estate tax planning strategies to help Illinoisans manage and reduce estate tax liability.

Understanding Estate Taxes in Illinois

The government levies estate taxes, often referred to as “death taxes,” on the estate of a deceased person. This is completed before assets are distributed to designated beneficiaries. The federal government sets an annual estate tax exemption level, which is the threshold above which estate taxes are applicable. In Illinois, state-level estate taxes also exist, but they have different exemption thresholds and percentage rates.

The first step in knowing how to avoid estate tax is to understand these exemption levels. In 2024, the federal estate tax exemption level is set at $13.61 million for individuals. This means it’s set at $27.22 million for married couples.

Illinois, however, imposes its own estate tax at thresholds lower than the federal exemption. This means that estates in Illinois can face state taxes even if they are exempt from federal taxes.

Strategies to Minimize Estate Taxes

  • Utilize Trusts: Trusts are a fundamental tool in estate planning. By placing assets in a trust, such as a grantor retained annuity trust (GRAT), you can reduce or eliminate your taxable estate. Trusts help you to both avoid taxes and maintain control over the distribution and management of your assets.
  • Annual Gifting: One of the simplest ways to reduce your estate’s value is through gifting. In 2024, the federal gift tax exclusion allows individuals to give up to $18,000 per recipient per year tax free. This means they can gift this amount without incurring gift tax or affecting the estate tax exemption amount. Annual lifetime gifting can significantly reduce the size of an estate over time.
  • Family Limited Partnerships (FLPs): FLPs can be used to manage and control family-owned businesses or assets while offering tax benefits. By transferring assets like a family business into an FLP, you can reduce the value of your taxable estate while still maintaining control over those assets.
  • Life Insurance Trusts: Life insurance proceeds can be subject to estate taxes if not properly structured. Setting up an irrevocable life insurance trust can exclude the proceeds from your taxable estate. This helps ensure that the full amount goes to your beneficiaries.
  • Charitable Contributions: Donating to charity can reduce the size of your estate and potentially provide income tax deductions. For example, charitable remainder trusts are a type of irrevocable trust that can provide income during your lifetime. After your passing, or once the predetermined payment term limit is reached, the remainder of the trust is donated to charity.

For residents in Rockford, understanding how to avoid Illinois estate tax requires specific local knowledge. The state’s exemption threshold is lower than the federal level, meaning strategic planning is crucial. Consulting with a skilled estate planning attorney is advisable to navigate these nuances and implement the most effective strategies.

Contact Our Estate Planning Lawyers in Rockford, IL

Estate tax planning strategies are not about evasion but about wise and lawful management of your assets. By understanding exemption levels, utilizing trusts and other strategies, you can significantly reduce the impact of federal and state taxes on your estate. This allows you to maximize the assets you leave to your beneficiaries.

Planning your estate with the future in mind is a compassionate act for those you care about. Remember, each estate is unique, and the strategies employed should reflect your specific circumstances and goals. There are different types of trusts you can utilize to reduce taxes, and many other avenues available.

Consulting with an experienced attorney can offer you peace of mind. At the Crosby Law Firm, we work to find the most ideal solution to estate taxes based on your preferences and needs.

If you have estate planning questions, we’re your trusted source for effective legal counsel. Contact us to schedule a free initial consultation.

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