If you have followed the recent talk in Springfield about raising the state estate tax exemption, it is worth knowing what the current rules actually cost married couples. Illinois taxes estates at a level far below the federal threshold, and couples who simply leave everything to each other often give up half of the shelter available to them. A credit shelter trust is the structure most commonly used to keep that from happening.
The Exemption Debate in Springfield
Governor Pritzker has voiced support for estate tax relief, pointing to farm families who struggle to pass operations to the next generation. The Illinois Farm Bureau has been pushing legislation that would move the state exemption to $6 million from the current $4 million, and the matter may be taken up in the fall veto session.
Proposals are not statutes. Until something passes and is signed, the planning math runs on today’s numbers, and couples in the range where this matters have no reason to wait on a legislative outcome.
Illinois Taxes Estates the Federal Government Leaves Alone
The state exclusion amount is $4 million. That figure has not moved in over a decade, and it is not indexed to inflation. The Illinois estate tax is administered by the Attorney General’s Office, and a return is required whenever the gross estate crosses that line.
The $4 million figure is a filing threshold, not a credit against tax. An estate valued just under it owes nothing. An estate valued just over it is taxed on the full base, not only on the amount above the line.
The Portability Gap
Federal law lets a surviving spouse claim whatever exclusion the first spouse didn’t use. Illinois has no such rule.
So when the first spouse leaves everything outright to the survivor, the marital deduction defers the tax, but the first spouse’s $4 million exclusion disappears. Everything then sits in the survivor’s estate, along with whatever it has grown into, with a single exclusion to cover all of it. Consider a couple with $7 million in combined assets. Under an outright arrangement, roughly $3 million becomes exposed at the second death that would have been fully sheltered with planning in place.
What a Credit Shelter Trust Actually Does
At the first death, assets up to the state exclusion amount fund a trust instead of passing directly to the surviving spouse. The result is two exclusions used rather than one.
The arrangement generally works like this:
- Trust assets are set aside at the first death and are not counted in the survivor’s taxable estate later.
- The surviving spouse can receive income from the trust and principal under stated standards, typically health, education, maintenance, and support.
- The survivor often serves as trustee, subject to limits on distribution authority.
- Growth inside the trust stays outside the second estate.
- The remainder passes to children or other named beneficiaries when the survivor dies.
Titling Decides Whether the Plan Holds
A trust that is never funded accomplishes nothing. Property held in joint tenancy with right of survivorship passes automatically to the survivor and never reaches the trust, and beneficiary designations on retirement accounts and life insurance operate the same way. Couples who hold every asset jointly frequently discover that the shelter they paid to create had nothing to fill it.
This is where our Skokie, IL trust lawyer spends real time, reviewing deeds, account titling, and designation forms so each spouse individually owns enough to fund the trust.
When Couples Should Review the Structure
Assets appreciate quietly. A plan drafted when a couple’s net worth sat at $2 million may be badly matched to a $5 million estate today. We generally suggest a fresh look after a business sale, a significant property purchase, an inheritance, or a change in marital status. Our broader estate planning services address how the trust coordinates with wills, powers of attorney, and beneficiary designations.
If your combined estate is approaching or already past $4 million, Kravets Law Group can review your current documents and asset titling and explain what a credit shelter arrangement would change for your family. Contact us to start that conversation.