Putting together an estate plan may feel like checking a box on a to-do list, but when used wisely this task can be a step towards building one’s financial portfolio. This is because putting together an estate plan requires an individual to review their assets and think of the future. This can impact investment strategies and lead to conversations about legal tools that can help make the most of investment opportunities and overall financial standing. Those who take the time to have these conversations are setting themselves up for future success.
An important part of this conversation is the impact of taxes on one’s estate. Estate taxes are levied on the transfer of property after death and can impact the value of what you leave behind for your heirs. A well-structured estate plan acts as a bulwark against taxes, helping to better ensure loved ones receive the maximum benefit from the estate. In Illinois, the estate tax applies to estates valued over $4 million. The value of an estate is calculated by summing all assets, including real estate, investments, and personal property. The amount owed varies as Illinois estate taxes are graduated and can reach up to 16%, depending on the value of the estate.
Estate taxes are not the only ones to be aware of when planning one’s estate, gift taxes may also apply. These are taxes that apply to gifts made to loved ones made during one’s lifetime. The federal gift tax exemption allows individuals to gift up to $19,000 per recipient annually in 2025 without incurring taxes. However, gifts exceeding this amount may be subject to taxation.
How can I minimize estate taxes?
You can make the most of your estate and build family wealth through the use of strategic planning to minimize these taxes. One example is the use of lifetime gifting, as noted above. Strategic gifting requires careful planning and should be done under the guidance of a legal counsel with experience in these matters to avoid legal issues. In addition to gifting with an awareness of the exemption amount discussed above, it is also wise to be mindful of the impact on Medicaid as improper asset transfers can affect eligibility.
Another strategy is to make use of trusts. Trusts are powerful legal tools for protecting assets and reducing tax liabilities. There are many types of trusts, and it is important to choose the one that best fits your needs. Trusts can result in greater control over the distribution of assets as well as the ability to lower estate taxes.
Is there anything else I should know about taxes when drafting or updating my estate plan?
Taxes are a bit like the mythical hydra. When you remove one head of the beast, two more take its place. This is true with questions about the impact of taxes on one’s estate plan. When you get information about the basics of the impact of taxes on your estate plan, you likely have additional questions. Some of the more common questions that arise include the following:
- Can I sell the family home to my child to reduce tax obligations? Selling your house to your child may not avoid estate taxes and could trigger gift taxes if sold below market value.
- What’s included in an estate under Illinois laws? An estate includes all assets owned at death, such as real estate, investments, and personal property.
- How do I know how much my heirs will need to pay in estate taxes? The Illinois Attorney General’s estate tax calculator can help to provide an estimate of your estate tax liabilities.
Estate planning can help minimizing taxes and better ensure your heirs receive the most from your estate. Legal counsel can help navigate you through this process, providing the attention to detail and care needed to draft a plan that meets your family’s needs. With an experienced attorney, you can rest assured that your estate plan is in capable hands.