As an estate planning attorney in Evanston, IL, I meet many people who know they should create or update their estate plan but feel overwhelmed by the tax implications and legal terms. If that sounds familiar, you’re not alone. My goal is to help you move from uncertainty to clarity—so you can stop putting this off and start protecting the people you care about.
This post breaks down the key federal and state tax concepts that affect Illinois residents. Whether you’re just getting started or need to review your existing plan, here’s what you should know in 2025.
Lifetime Exemptions: Federal and Illinois
In 2025, the federal lifetime estate and gift tax exemption is $13.99 million per individual. This is the amount you can transfer—during your lifetime or at death—without triggering federal estate or gift taxes.
Illinois also imposes its own estate tax, with a much lower exemption of $4 million per individual. Unlike federal law, Illinois does not allow a surviving spouse to use any unused portion of their spouse’s exemption. This difference makes state-level planning especially important for families with assets over the Illinois threshold.
For example, if someone passes away in Illinois with a $5 million estate (an estate in excess of the exemption amount by $1 million), the estate will be subject to Illinois estate tax, even though it’s well below the federal exemption.
Annual Gift Tax Exclusion
In 2025, you can give up to $19,000 per person per year without it counting against your federal lifetime exemption. For a married couple, that’s $38,000 per recipient. These gifts are not taxable and don’t need to be reported, as long as they remain within the annual exclusion limit.
Only gifts above that limit reduce your lifetime exemption. For instance, if you give your child $25,000 in 2025, $19,000 is excluded, and the remaining $6,000 would count against your lifetime exemption.
Over time, consistent annual gifting can be a useful strategy in broader gift tax planning in Illinois, especially for families looking to transfer wealth in a tax-efficient way.
Marital Deduction and the Risk of Missed Exemptions
The unlimited marital deduction allows you to transfer any amount to a U.S. citizen spouse without incurring federal or Illinois estate tax. However, without additional planning, this benefit can create a missed opportunity at the state level.
Here’s a comparison to illustrate the point:
Scenario 1: John and Mary are Illinois residents with a combined estate of $6 million. John passes away first and leaves his entire $4 million estate to Mary. Because of the marital deduction, no estate tax is owed at his death. However, when Mary later dies with $6 million in her name, her estate exceeds her $4 million Illinois exemption amount, and Illinois estate tax will be owed by her estate.
Scenario 2: Instead, John’s estate plan leaves $3 million to a trust that uses his Illinois estate tax exemption and $1 million to Mary. Now, Mary has $3 million in her name. When she dies, her estate will owe no tax because her estate is less than her $4 million Illinois exemption amount.
This is just one example of how intentional planning can make a significant financial difference. These strategies are not one-size-fits-all, but they show how failing to use available exemptions can lead to higher taxes later.
Understanding Basis in Estate Planning
“Basis” refers to the value of an asset for tax purposes—usually what you paid for it. When you gift an asset during your lifetime, the recipient receives your original basis (called carryover basis). But when assets are inherited at death, the basis usually “steps up” to the fair market value at the date of death.
For example, if you bought stock for $10,000 and it’s worth $50,000 when gifted, the recipient’s basis is $10,000. If they sell it, they may owe capital gains tax on $40,000. If the same stock is inherited instead, the new basis becomes $50,000—potentially eliminating capital gains tax if sold right away.
This is why understanding how and when assets are transferred is an important part of estate planning.
Taxation of Inherited Qualified Retirement Accounts
Qualified retirement accounts, like IRAs and 401(k)s, are another critical area. When non-spouse beneficiaries inherit these accounts, they are generally required to withdraw the full balance within 10 years—and pay income tax on each distribution. This is sometimes referred to as the 10-year rule.
For example, if a child inherits a $500,000 IRA, they may need to withdraw roughly $50,000 each year for 10 years. These withdrawals count as ordinary income and could push them into a higher tax bracket.
There are exceptions to this rule for certain eligible designated beneficiaries—like surviving spouses, minor children (while they are still minors), and beneficiaries with disabilities—who may have more flexible withdrawal options.
This area of estate planning is complex, with both tax and legal implications. The right strategy depends on your beneficiaries’ financial situation, age, and needs.
Final Thoughts
Estate planning isn’t just about taxes—it’s about making thoughtful decisions that protect your loved ones, preserve your assets, and reduce unnecessary burdens in the future. Whether you’re trying to minimize estate tax exposure or just want to know your affairs are in order, getting a plan in place can be one of the most meaningful gifts you leave behind.
As an estate planning lawyer in Evanston, IL, I help proactive adults turn good intentions into completed plans. If estate planning has been on your to-do list for too long, I’d be happy to help you go from “someday” to done.
