erson in 2026 and was made permanent under the One Big Beautiful Bill Act (per the Internal Revenue Service). Most families will never owe a dollar of federal estate tax. That is the number people hear, and it is the number that creates a false sense of safety.
Illinois runs its own estate tax, and it does not follow the federal lead. The Illinois exclusion sits at $4 million per person, has not changed in over a decade, and is not indexed for inflation (see the Illinois Attorney General estate tax fact sheet). Illinois also offers no automatic portability between spouses, so a married couple cannot simply pass an unused exclusion to the survivor. The proper planning can change that.
Add it up. A paid-off home, two retirement accounts, some investments, and a $1 million policy you own outright can push a family that never felt wealthy past $4 million. Everything over the line is taxed at graduated rates that climb to 16 percent.
How an Irrevocable Life Insurance Trust Changes the Math
An irrevocable life insurance trust, often called an ILIT, is a Trust that owns the policy instead of you. Because you do not own it, the death benefit is not part of your taxable estate. The proceeds pass to your beneficiaries outside the reach of the Illinois estate tax.
The mechanics are straightforward once you see them. The Trust applies for and owns the policy. You make annual gifts to the Trust to cover the premiums. At your death, the Trustee receives the proceeds and distributes them according to the instructions you wrote.
Two Timing Rules Worth Knowing
First, a new policy purchased directly by the ILIT avoids inclusion from day one. If you transfer an existing policy you already own into an ILIT, the three-year rule pulls the death benefit back into your estate if you pass away within three years of the transfer. Starting fresh inside the Trust sidesteps that risk.
Second, an ILIT is irrevocable by design. You give up direct control of the policy in exchange for the tax result. For families near or over the $4 million line, that trade is often worth it. For families well under it, a simpler structure may serve better.
What We Look At in a Review
A couple came to us last year certain they had nothing to worry about because they were far below the federal exemption. Their home in Cook County had nearly doubled in value. Between two retirement accounts and a $2 million second-to-die policy they owned personally, their combined estate was well over $4 million. Under Illinois law, and with no automatic portability to lean on, their family faced a real state estate tax bill.
We restructured the policy ownership through an ILIT and coordinated it with their broader plan. The coverage stayed the same. The exposure came down substantially.
One Thing to Do This Month
Add up your home equity, retirement accounts, investments, business interests, and the face value of any life insurance you own personally. If that total is close to or above $4 million, your policy may be adding to a state estate tax problem rather than solving one.
If you are near that threshold, an Estate Planning consultation with an attorney who works in Illinois estate tax will tell you whether an ILIT or a credit shelter structure fits your situation. We work through those numbers with families quietly and without pressure, so you know exactly where you stand before you decide anything.
