You've worked hard to create a legacy.
And whether you’re leaving your estate to a spouse, children, grandchildren, or a charitable organization, it's now is the time to review your plans to ensure your wealth stays in the family.
Under current rules, only estates valued at over $13.61 million (for individuals) are required to pay a tax before transferring to heirs. However, the current estate tax rules are set to expire at the end of next year, decreasing the size of estates that will be exempt entirely—and increasing the amount of taxes for any individual estate over about $7 million.
Here in Illinois and Indiana, this change could have a big impact on families with businesses—especially farm families—who often have larger estate values, but don’t have the liquid funds required to cover potential estate taxes.
If you are concerned about changes to estate tax law, and how your family could be affected, this blog is for you. We’ll explore the current federal estate tax rules, potential changes to them, and things that you can do to ensure that as much of your estate remains intact for the benefit of your heirs.
Overview of Estate Gift Tax Changes
Before the Tax Cuts and Jobs Act of 2017 (TCJA), the estate exemption amount was $5.49 million per individual estate. In other words, the first $5.49 million of an estate would not be subject to federal tax (though could still be subject to state estate taxes).
The TCJA nearly doubled this exemption to $11.18 million for individuals and $22.36 million for married couples in 2018. This higher exemption limit is further adjusted annually for inflation. Today’s exemption (2024) comes in at $13.61 million for individuals and $27.22 million for couples. This amount is a lifetime exemption—so if you gifted a significant portion of your estate earlier, that amount would be deducted from this limit.
However, the changes made to estate taxes with the TCJA are not permanent. These changes are set to expire at the end of 2025, after which the exemption levels will revert to previously lower amounts, adjusted for inflation—an estimated $7 million for 2026.
While the temporary exemption is sunsetting, it is possible that new legislation will make the change permanent—but don’t count on it. Instead, it may make sense to explore how you can use other tools to create a strategy that allows you to pass on the most to your heirs and preserve your farming legacy.
How are Families in Indiana and Illinois Impacted by the Estate Tax Sunsetting?
Even $7 million will seem like a large amount to most people. Under the current levels, only about .14% of American estates will need to pay federal estate tax at all. Under previous levels, only 2 in every 1,000 estates owed taxes. However, families who own businesses—especially agricultural enterprises with land and expensive equipment—might find that estate transfer taxes, which often estimate the value of a business, could eat up a big enough chunk that puts the entire operation in jeopardy.
Who will changing tax rules impact?
Let’s take a look at the numbers to see exactly who the tax will affect, so you can determine if it’s important for you to take actionable steps.
- A single individual’s estate under $7 Million: No federal tax.
- A single individual’s estate under over $7 Million: 18-40% tax paid by estate on portion of estate over $7 million.
- A married couple’s estate under $14 Million: No federal tax.
- A married couple’s estate over $14 Million: 18-40% tax paid by estate on portion of estate over $14 million.
Note: All numbers are estimates based on inflation and previous rules surrounding estate tax exemptions. Speak to your estate planner or wealth advisor to learn more about potential rule changes.
What assets are considered part of a taxable estate?
To accurately add up the value of the estate, it’s important to understand what assets are taxed. These include:
- Cash and Bank Accounts: Money held in checking, savings, or other financial accounts.
- Real Estate: Homes, land, and commercial properties.
- Investments: Stocks, bonds, mutual funds, and other securities.
- Retirement Accounts: IRAs, 401(k)s, and pensions (though these may have different tax implications).
- Personal and Business Property: Valuable items such as jewelry, art, antiques, vehicles, and equipment.
- Life Insurance Proceeds: These may depend on the ownership and beneficiary designations—check with your estate planner to verify potential tax liability.
State-Level Taxes
Some states have their own estate or inheritance taxes, with rates as high as 20%.
Indiana has no additional estate or inheritance tax. In Illinois, estates exceeding $4 million are subject to a progressive tax rate of up to 16%—on top of any federal taxes owed. This tax is paid by the estate before it can be transferred. There is no inheritance tax paid by beneficiaries in Illinois.
Methods to Preserve Generational Wealth
It may be possible to reduce an estate’s value (or taxable value) in advance, so that less estate is lost to taxes down the line.
Give It Away Early
Making direct gifts of cash, land, securities, or other assets can help you reduce the amount of your estate that will be subject to taxes. Let’s look at a few ways you might be able to do so.
Annual Gift Tax Exemption
The annual gift tax exemption allows individuals to gift assets without requiring the recipient to pay federal taxes. It can be used to lower the total taxable estate size upon death, thus reducing the amount of taxes paid, if the estate is valued over the limits mentioned above.
The current annual gift tax is $18,000 per recipient and $36,000 for couples. The annual gift tax exemption amount does not count against your above-mentioned lifetime exemption. This means that if you have a larger estate, over the years you could reduce your estate enough through these annual gifts that it falls below the lifetime exemption limit.
Non-taxable Gifts
You may also consider gifts that aren’t counted toward any exemption limit and won’t be subject to taxes. These include paying directly for tuition costs for loved ones. You may also pay for medical expenses for your benefactors.
Take Advantage of Current Lifetime Limit Exemptions
The IRS has an anti-clawback rule for these upcoming estate tax changes. If you decide to give away a portion of your estate today (before death) to reduce the value of your estate, it will be subject to today’s lifetime estate exemption ($13.61 million for individuals), not the future exemption limit. Talk to your accountant or estate planner to learn more about how this could work for you.
Consider Trusts
Trusts are an additional way to safeguard estates from taxes.
Spousal Lifetime Access Trusts (SLATs) are great for married couples with larger estates. With a SLAT, one spouse creates a trust for the benefit of the other spouse, allowing the assets placed in the trust to be removed from the grantor's estate for tax purposes, while still providing indirect access to the funds through the beneficiary spouse.
If you have a large life insurance policy, an Irrevocable Life Insurance Trust (ILIT) can hold your policy outside of the taxable portion of your estate. By doing this, the death benefit from the life insurance policy is not included in your estate or counted toward the exemption limit.
A Charitable Remainder Trust (CRT) effectively sets aside an estate’s assets for a set period before assets are given to a designated charity. However, CRTs allow the estate holder or beneficiaries to draw an income from the estate during that time, reducing the value of the estate little by little. By transferring assets to a CRT, you can remove assets from your taxable estate, potentially reducing estate taxes. Additionally, you (the estate owner) may receive a charitable deduction for the gift, further lowering tax liabilities.
Lastly, a Dynasty Trust, popular among farm families, is a trust designed to extend over multiple generations. It allows wealth to be transferred to descendants without incurring estate, gift, or generation-skipping transfer taxes, aiming to preserve wealth within a family for as long as possible.
Make a Plan, Talk to Your Advisor, and Act Now
If your estate will be subject to more taxes under 2026 rules, failing to act strategically today could result in a much higher tax rate on your estate down the road—and potential losses for your heirs. But whether or not you are concerned about estate tax changes, it’s important to take the time to get your affairs in order. Not only could you lower the amount your estate or your heirs pay in taxes, it also can also lessen family tensions, relieve the burden on your loved ones when settling your estate, and give you the peace of mind knowing that you and your family will be taken care of.
Estate planners should be met with regularly to revisit plans and update your documents—and whenever a major change in your life situation or financial picture occurs. Your estate planner can help you devise a plan to protect your estate and facilitate a smooth transition to your beneficiaries.
At First Bank, we’ve worked hard to support our local communities and farm families in Illinois and Indiana since 1893.
Reach out to us to see how we can support you as you navigate your estate planning process and preserve your farm—and your legacy—for generations to come.
