Illinois Estate Tax Planning: Portability, Family Trusts and Protecting Children’s Inheritance

 Posted on October 20, 2026 in Estate Tax Planning

A couple living in Kendall County with a paid-off home, retirement accounts, a life insurance policy, and some farmland outside town may not think of themselves as wealthy. However, when the value of these assets is added together, the total may pass the threshold for estate taxes in Illinois. When that happens, the family may owe the state hundreds of thousands of dollars after a person’s death. Fortunately, taking the proper steps during the estate planning process can help to reduce or avoid estate taxes.

When planning for wealth preservation that will minimize estate taxes in Illinois, families need to consider the total value of everything they own, the gap between the tax rules in Illinois and at the federal level, how assets will pass between spouses, and what steps can be taken to keep assets out of a taxable estate, and how to preserve inheritances for children and grandchildren. The most important thing to understand is that Illinois taxes estates at a much lower level than the federal government does. A plan that only looks at federal taxes can leave a family exposed to a large state tax bill. Guidance from an estate planning attorney can help ensure that these issues will be addressed correctly.

How Does the Illinois Estate Tax Work?

Estate taxes apply to the total value of what a person owns when they die. These taxes are paid out of the estate before the heirs receive their inheritance. Illinois has defined estate taxes under the Illinois Estate and Generation-Skipping Transfer Tax Act, and it is separate from the federal estate tax.

As of October 2026, Illinois taxes estates that are worth more than $4 million. That threshold is not adjusted for inflation, so it has stayed the same while home values, farmland prices, and retirement savings have grown. Several bills to raise the estate tax threshold or tie it to the federal estate tax threshold have been introduced in the General Assembly, but none has become law.

What Counts as Part of a Taxable Estate?

Many people are surprised by what assets may be included when determining eligibility for estate taxes. A taxable estate generally includes:

• Homes and any other real estate, including farmland

• Bank accounts, retirement accounts, and investment accounts

• The death benefit of life insurance policies

• Business interests and ownership in a family farm

• Vehicles, equipment, and other valuable personal property

Around Yorkville and the rest of Kendall County, rising land values are a major reason why more families are approaching the $4 million threshold. A few hundred acres of cropland, combined with a home and savings, can easily put an estate over the line.

What Is the Illinois Estate Tax Cliff?

In Illinois, once an estate exceeds the threshold of $4 million, estate taxes will apply to the entire estate, not just the amount above $4 million. That means an estate worth slightly more than the threshold can owe a surprisingly large amount of taxes.

How Is the Federal Estate Tax Different From Illinois State Estate Taxes?

The federal estate tax applies to far fewer families. Under the One Big Beautiful Bill Act, which was signed in July of 2025, the federal estate tax exemption is $15 million per person starting in 2026, and this amount will be adjusted for inflation in future years. Unlike state estate taxes in Illinois, the federal estate tax only applies to the value of an estate that exceeds the threshold. For an Illinois family with an estate valued between $4 million and $15 million, no federal tax may be owed, but the state tax can still be significant.

What Is Estate Tax Portability?

Portability is a federal rule that lets a surviving spouse use whatever part of their deceased spouse's federal estate tax exemption that had not been used. The unused amount is called the deceased spousal unused exclusion (DSUE).

Suppose a husband dies and leaves all of his assets to his wife. Because property left to a spouse is generally not taxed, he uses none of his $15 million federal estate tax exemption. With portability, his wife can add his unused exemption to her own. When she dies, up to $30 million may be excluded from federal estate taxes.

How Is Portability Claimed?

Portability is not automatic. The executor of the first spouse's estate must file a federal estate tax return in which they choose to transfer the unused estate tax exemption. The executor is the person in charge of handling the estate during the probate process. The estate tax return is generally due nine months after a person’s death. In many cases, the IRS may allow a late portability election for up to five years after a person’s death.

In some cases, families may skip this step because no tax is owed after the death of the first spouse. That can be a costly mistake, especially if the surviving spouse's assets grow, if they inherit money, or if federal law changes. Using estate tax exemptions correctly can save a great deal of money.

Does Illinois Allow Portability?

No. This is one of the most important points for Illinois families. A surviving spouse cannot use the other spouse's unused $4 million state estate tax exemption. If the first spouse leaves all of their assets to their spouse, the first $4 million exemption will be lost.

How Can Family Trusts Reduce Estate Taxes?

When a person or couple creates a trust, they will place assets in the control of a trustee, who will manage the assets for the benefit of beneficiaries. Several kinds of trusts can help families lower their estate tax bill:

Credit Shelter Trusts

A credit shelter trust, which may also be called a family trust or bypass trust, is one of the primary tools that families in Illinois can use to make up for the lack of state estate tax portability. When the first spouse dies, up to $4 million of their assets may go into a trust instead of passing outright to the surviving spouse. That can ensure that the first spouse's Illinois estate tax exemption will be used correctly.

The surviving spouse can still benefit. They may receive income from the trust and money for their health, education, and support. Because the assets do not legally belong to the surviving spouse, they are not counted as part of their estate. When the surviving spouse dies, the trust will pass to children or other beneficiaries without Illinois estate tax being applied.

Marital Trusts

Assets above the amount placed in a family trust may go into a marital trust for the benefit of the surviving spouse. A qualified terminable interest property (QTIP) trust will allow a family to delay Illinois estate taxes until the death of the second spouse while still using the full federal estate tax exemption. This can provide flexibility when addressing both federal and state estate tax rules.

Irrevocable Life Insurance Trusts

Life insurance is easy to overlook, but the value of a policy owned by a person or married couple will count fully toward their estate. An irrevocable life insurance trust (ILIT) may be used to own a policy instead of having it be directly owned by a couple. Because this type of trust is irrevocable, it generally cannot be changed or canceled once it is created. When a person dies, the insurance proceeds will be paid to the trust, and they will not be included in their taxable estate.

Lifetime Gifts

Illinois does not have a gift tax, but federal gift taxes may apply when making large gifts. In 2026, federal law allows a person to give up to $19,000 to individual people each year without filing a gift tax return. A married couple can give $38,000 to each child or grandchild. Over time, these gifts can lower the value of an estate.

How Can a Family Protect Your Children's Inheritances?

Reducing taxes is likely to be only part of a family’s overall goals. Parents may also want to make sure their children's inheritances will be used wisely and will not be lost to outside threats. Some options for protecting inheritances include:

Place Assets in Trusts Instead of Leaving Them to Children Outright

When children inherit money or other property outright, it becomes theirs to spend or use as they wish. These assets could be lost to creditors or divided in a divorce. Leaving an inheritance in a trust can provide more control. Money may be released to children when they reach certain ages, or a trustee may use assets to make payments for education, housing, or starting a business.

Use Spendthrift Protections

The Illinois Trust Code allows trusts to include a spendthrift clause. This provision may prevent a beneficiary from selling or pledging their future inheritance, and it will generally keep creditors from filing claims against the assets in a trust. This can help protect a child who struggles with money, faces a lawsuit, or goes through a divorce.

Keep an Estate Plan Up to Date

Tax laws change, and so do families. The federal estate tax exemption has been adjusted several times during the last decade, and Illinois lawmakers may make adjustments to the state estate tax threshold. Reviewing an estate plan every few years, or after major changes, such as births, deaths, marriages, or divorces, can make sure a family’s needs will be met in the future.

Contact Our Yorkville Estate Tax Planning Attorneys

The estate tax rules that may apply after a person’s death can catch families off guard, especially when they do not realize that the value of an estate exceeds the estate tax threshold. Thoughtful planning can help reduce the taxes a family may owe, and it can also protect the inheritances intended for children and grandchildren. At Gateville Law Firm, our Aurora estate planning and asset protection lawyers can review a family’s assets and explain the best options for protecting against financial losses while planning for the future. Contact us at 630-780-1034 to arrange a complimentary family wealth planning strategy session.