The situation
Robert and Susan K. are a Highland Park couple in their early seventies with a $5.5M estate: a $1.2M home they have lived in for thirty-one years, $2.8M between two IRAs and a 401(k) rollover, $800K of permanent life insurance on Robert, and roughly $700K of taxable brokerage accounts and miscellaneous assets. Three adult children, four grandchildren, and a clear desire to leave the bulk of their estate intact for the next two generations.
Their existing plan was a basic reciprocal will from 1998, "all to spouse, then equally to the kids", and the original life insurance had Susan as the named beneficiary. They had been meaning to update everything for years.
The challenge
Illinois has its own estate tax with a $4M exemption and rates that climb to roughly 16% on amounts above. Federal exemption is generous enough that they wouldn't owe federal estate tax under current law. But the Illinois exposure was real and growing.
Under their existing simple-will structure, all $5.5M would pass to the surviving spouse at first death (no Illinois tax, unlimited marital deduction), but then sit in the survivor's estate. At second death, the entire $5.5M would face Illinois tax on $1.5M of overage, producing a bill of approximately $300K. Worse, the $800K life insurance death benefit was includable in Robert's estate because he owned the policy outright, pushing Susan's eventual Illinois exposure even higher if Robert went first.
They had also never updated the IRA beneficiaries after their oldest son's divorce. The ex-daughter-in-law was still listed as a contingent beneficiary on a $1.1M rollover IRA. Nobody noticed for nine years.
Our approach
We coordinated with their estate attorney to replace the simple wills with reciprocal AB trusts. The structure: at first death, $4M of the deceased spouse's assets fund a credit shelter trust ("B trust") that uses the deceased spouse's full Illinois exemption. The surviving spouse gets income and limited principal access from the B trust during their lifetime, but the assets themselves are out of the survivor's estate, meaning at second death, only the survivor's own $4M exemption is needed to cover their assets. Both exemptions captured. No Illinois estate tax.
For the life insurance, we set up an irrevocable life insurance trust (ILIT). Robert transferred ownership of the $800K policy to the trust, and the trust now owns the policy. Three years past the transfer, the death benefit is entirely outside Robert's taxable estate. The trust beneficiaries are the children directly, with provisions for the grandchildren.
We then did the unsexy but essential work: a complete beneficiary review. Removed the ex-daughter-in-law from the rollover IRA. Updated all primary and contingent designations. Set up per-stirpes language so the grandchildren wouldn't be cut out if a parent predeceased. Reviewed the 401(k) plan documents to confirm the rollover beneficiary structure carried through.
Finally, we ran a state-of-residence analysis. They had toyed with moving to Florida, partly for taxes. We showed them: at their estate size, the AB trust + ILIT structure captured nearly all the available Illinois savings, and Florida's $0 estate tax exemption wouldn't save them additional dollars since Illinois already exempts retirement income from state income tax. The financial case for moving was weaker than the family case for staying.
The outcome
The combined plan eliminates roughly $300K of projected Illinois estate tax at second death. The life insurance proceeds, approximately $800K, pass to the children through the ILIT entirely outside the estate. The beneficiary cleanup ensured that an outdated designation doesn't redirect $1.1M to a person no longer in the family.
Just as important, the structure adapts. If Illinois changes the exemption, or federal law shifts, the trusts have provisions to flex. The ILIT is permanent, but the AB trusts contain disclaimer language that lets the survivor decline the credit shelter funding if circumstances change.
The takeaway
Illinois estate tax is the most under-discussed wealth issue on the North Shore. Federal exemptions get all the attention, but at $4M the Illinois threshold catches a lot of families with a paid-off home, a healthy retirement account, and a life insurance policy. The structure to fix it has been around for decades. The hard part is sitting down with a planner and an estate attorney and actually doing it.