Illinois is one of only twelve states (plus the District of Columbia) that imposes its own estate tax separate from the federal estate tax. With an exemption threshold of $4 million—significantly lower than the federal exemption—many Illinois families face state estate tax liability that could have been minimized or eliminated with proper planning. This guide provides a thorough overview of how the Illinois estate tax works, who it affects, the tax rates you can expect, and strategies to reduce or avoid the tax entirely.
How the Illinois Estate Tax Works
The Illinois estate tax applies to the estates of Illinois residents whose gross estate exceeds $4 million at the time of death. The tax is imposed on the transfer of the entire taxable estate, not just the amount exceeding the exemption. This is an important distinction: once an estate crosses the $4 million threshold, the entire estate is subject to tax, though a credit effectively shelters the first $4 million. The tax is calculated using a graduated rate structure, and the estate's personal representative (executor) is responsible for filing the Illinois estate tax return and paying any tax due.
The Illinois estate tax is calculated based on the maximum state death tax credit that was allowed under the federal estate tax law as it existed in 2001, before the federal credit was phased out. This means Illinois uses a specific formula tied to the pre-2001 federal credit table rather than a simple flat percentage. The effective tax rates range from approximately 0.8% to 16%, depending on the size of the estate, though most estates pay effective rates between 4% and 10%.
The Illinois estate tax is imposed on the transfer of the taxable estate of every resident and nonresident decedent whose federal gross estate exceeds $4,000,000. The tax is computed using the rate schedule from the former federal state death tax credit under IRC Section 2011 as in effect on December 31, 2001.
35 ILCS 405/2 — Illinois Estate and Generation-Skipping Transfer Tax Act
Illinois vs. Federal Estate Tax
Understanding the difference between Illinois and federal estate taxes is critical for proper planning. Many people assume that if they are below the federal threshold, they have no estate tax exposure. This is a dangerous misconception for Illinois residents.
| Feature | Illinois Estate Tax | Federal Estate Tax |
|---|---|---|
| Exemption Amount (2025) | $4 million per individual | $13.99 million per individual (indexed for inflation) |
| Portability Between Spouses | Not available — each spouse must use their own exemption or lose it | Available — unused exemption transfers to surviving spouse |
| Tax Rates | Graduated: ~0.8% to 16% | Graduated: 18% to 40% |
| Filing Threshold | Gross estate exceeds $4 million | Gross estate exceeds the federal exemption amount |
| Return Due Date | 9 months after date of death (same as federal) | 9 months after date of death |
| Extension Available | Yes, 6-month extension available | Yes, 6-month extension available |
| Deductions | Marital deduction, charitable deduction, debts, expenses | Same deductions plus state death tax deduction |
| Who Pays | Estate of decedent | Estate of decedent |
The Portability Gap Is a Major Trap
Unlike the federal estate tax, Illinois does not offer portability. This means that when the first spouse dies, their $4 million Illinois exemption is lost forever unless their estate plan is specifically structured to preserve it (typically through a credit shelter or bypass trust). A married couple without proper planning effectively loses $4 million of combined exemption, potentially resulting in hundreds of thousands of dollars in unnecessary tax.
Who Is Subject to Illinois Estate Tax?
The Illinois estate tax applies to two categories of decedents: Illinois residents whose worldwide gross estate exceeds $4 million, and non-residents who own real estate or tangible personal property located in Illinois and whose total gross estate exceeds $4 million. For residents, all assets wherever located are included in the gross estate. For non-residents, the tax applies only to the Illinois-situated property, but the calculation still considers the total gross estate.
The gross estate for Illinois purposes generally mirrors the federal gross estate and includes all property owned at death plus certain transfers made during life (such as assets in revocable trusts, life insurance proceeds where the decedent held incidents of ownership, jointly held property, and certain transfers made within three years of death). It is not unusual for estates to exceed $4 million when you include the family home, retirement accounts, life insurance death benefits, investment accounts, and other assets.
Common Assets That Count Toward the $4 Million Threshold
Your primary residence, vacation homes, rental properties, and any other real estate you own are included at their fair market value on the date of death. In the Chicago metropolitan area, a single-family home can account for a significant portion of the $4 million threshold. Land contracts and partnership interests holding real estate are also included.
Illinois Estate Tax Rates and Calculations
The Illinois estate tax rate structure is graduated, meaning larger estates pay higher effective rates. The following table provides approximate effective tax rates for various estate sizes.
| Taxable Estate Value | Approximate Illinois Estate Tax | Effective Tax Rate |
|---|---|---|
| $4 million (at threshold) | $0 (credit eliminates tax) | 0% |
| $4.5 million | ~$64,400 | ~1.4% |
| $5 million | ~$144,600 | ~2.9% |
| $6 million | ~$308,800 | ~5.1% |
| $8 million | ~$648,600 | ~8.1% |
| $10 million | ~$1,009,000 | ~10.1% |
| $15 million | ~$1,791,800 | ~11.9% |
| $20 million | ~$2,591,800 | ~13.0% |
The Illinois Estate Tax Cliff
Illinois has what is sometimes called an estate tax cliff. An estate valued at $3,999,999 owes zero Illinois estate tax. An estate valued at $4,000,001 immediately owes approximately $15,000-$20,000 in tax. This cliff effect means that estates near the $4 million threshold can achieve dramatic tax savings by reducing the taxable estate even slightly below the exemption amount.
Filing Requirements and Deadlines
1
Determine If Filing Is Required
An Illinois estate tax return is required if the decedent was an Illinois resident with a gross estate exceeding $4 million, or a non-resident with Illinois-situated property and a total gross estate exceeding $4 million.
2
File the Illinois Estate Tax Return
The return must be filed with the Illinois Attorney General's Office within 9 months of the date of death using Form 700. If a federal estate tax return (Form 706) is required, the Illinois return should be consistent with the federal return.
3
Request an Extension If Needed
A 6-month extension is available by filing a request before the original due date. However, an extension of time to file is not an extension of time to pay. Interest accrues on any unpaid tax from the original due date.
4
Pay the Tax Due
The estate tax must be paid from the estate's assets. The executor should ensure sufficient liquid assets are available. If the estate lacks liquidity, the executor may need to sell assets or arrange financing.
5
Obtain the Estate Tax Closing Letter
After the return is reviewed and any tax is paid, the Attorney General's Office issues a closing letter. This letter is often required to finalize the probate proceeding and transfer title to real estate.
Strategies to Minimize Illinois Estate Tax
Effective estate tax planning can significantly reduce or even eliminate Illinois estate tax liability. The best approach depends on your specific circumstances.
Because Illinois does not offer portability, a credit shelter trust is essential for married couples with combined estates over $4 million. When the first spouse dies, up to $4 million is placed in an irrevocable trust that benefits the surviving spouse during their lifetime but is not included in the surviving spouse's taxable estate at their death. This preserves both spouses' $4 million exemptions, sheltering up to $8 million from Illinois estate tax. A revocable living trust is typically used to fund the credit shelter trust at the first death.
Annual gifts up to the federal gift tax exclusion amount ($19,000 per recipient in 2025) are not included in the taxable estate. A married couple can gift $38,000 per year to each child, grandchild, or other recipient. Over time, a systematic gifting program can transfer substantial wealth out of the taxable estate. Additionally, gifts paid directly to educational institutions for tuition or to medical providers for medical expenses are not subject to gift tax limits.
By transferring ownership of life insurance policies to an irrevocable life insurance trust, the death benefit is removed from the taxable estate. The ILIT must be established and the policy transferred at least three years before death. ILITs can also provide liquidity to pay estate taxes on other assets without the life insurance itself being taxed.
Charitable bequests are fully deductible for Illinois estate tax purposes. More sophisticated strategies include charitable remainder trusts (CRTs), which provide income to family members and then pass the remainder to charity, and charitable lead trusts (CLTs), which provide income to charity and then pass assets to family members at reduced transfer tax cost.
A QPRT allows you to transfer your home to an irrevocable trust while retaining the right to live in it for a specified term. At the end of the term, the home passes to your beneficiaries. The gift tax value is significantly less than the home's fair market value. QPRTs are most effective when the homeowner is relatively young and the home has significant appreciation potential.
Transferring assets to a family limited partnership or LLC and gifting limited interests can reduce the taxable estate through valuation discounts of 20-35%. The IRS scrutinizes these arrangements closely, and they must have legitimate non-tax business purposes. When properly structured, these can be powerful estate tax reduction tools.
A SLAT allows one spouse to create an irrevocable trust for the benefit of the other spouse and potentially children. Assets in the SLAT are removed from the grantor spouse's taxable estate, but the beneficiary spouse can access trust funds if needed. Couples often create reciprocal SLATs, though care must be taken to avoid the reciprocal trust doctrine.
Planning for Estates Near the $4 Million Threshold
The Power of Small Reductions Near the Threshold
If your estate is valued at $4.2 million, you face approximately $35,000-$40,000 in Illinois estate tax. By gifting just $200,000 to family members or charity, you eliminate the entire tax. For estates at $4.5 million, the tax is approximately $64,000—a systematic gifting program started 3-5 years in advance could reduce the estate below the threshold and save the full amount.
Illinois Estate Tax and Non-Residents
Non-residents of Illinois who own real estate or tangible personal property located in Illinois may be subject to Illinois estate tax. The tax is calculated by first determining the tax on the entire estate as if the decedent were an Illinois resident, and then apportioning based on the ratio of Illinois property to the total gross estate.
For non-residents who own Illinois real estate, transferring the property to a revocable living trust does not avoid Illinois estate tax (the trust assets are still included in the gross estate), but it can help avoid Illinois probate proceedings.
Interaction with Federal Estate Tax
For estates large enough to owe both federal and Illinois estate taxes, the Illinois tax paid is deductible on the federal estate tax return. Planning must consider both tax regimes simultaneously.
Federal Exemption Sunset in 2026
The current federal estate tax exemption of approximately $13.99 million per person is set to expire at the end of 2025 under the Tax Cuts and Jobs Act sunset provisions. Unless Congress acts, the exemption will revert to approximately $7 million (indexed for inflation). This change would make both federal and Illinois estate tax planning critical for many more families.
Frequently Asked Questions
If you establish domicile in a state without an estate tax (such as Indiana or Florida), your estate would not be subject to Illinois estate tax on non-Illinois assets. However, any real estate you still own in Illinois would remain subject to Illinois estate tax. Illinois may challenge a domicile change if significant connections to the state remain.
Yes. Assets in a revocable living trust are included in the gross estate because the grantor retained the right to revoke or amend the trust. The trust avoids probate, not estate tax. To remove assets from the taxable estate, they must be transferred to an irrevocable trust.
The $4 million exemption has been in place since 2013 and is not indexed for inflation. Legislative proposals to increase the exemption have been introduced but not passed. Planning should be based on the current threshold while maintaining flexibility.
Each state can impose its own estate tax on property within its borders. Illinois provides a credit for estate tax paid to other states on the same property, helping avoid double taxation.
The unlimited marital deduction allows assets passing to a surviving spouse to be exempt from estate tax at the first death. However, this merely defers the tax. Without a credit shelter trust to preserve the first spouse's $4 million exemption, the surviving spouse's estate has only one exemption.
Illinois Estate Tax: Key Points to Remember
- Illinois imposes estate tax on estates exceeding $4 million, with effective rates ranging from approximately 0.8% to 16%
- The $4 million exemption is NOT portable between spouses—both spouses must use proper planning (typically credit shelter trusts) to preserve both exemptions
- A cliff effect means estates just over $4 million face immediate tax liability, making threshold planning especially valuable
- Life insurance, retirement accounts, real estate, and jointly held property all count toward the $4 million threshold
- The federal estate tax exemption is scheduled to decrease significantly in 2026, potentially affecting many more families
- Strategies such as lifetime gifting, irrevocable trusts, charitable planning, and credit shelter trusts can significantly reduce or eliminate Illinois estate tax
- Early and proactive planning provides the greatest flexibility and the most options for tax reduction
Get Professional Estate Tax Planning Help
Illinois estate tax planning requires careful analysis of your assets, family situation, and goals. Given the complexity and the significant financial impact of estate taxes, working with an experienced Illinois estate planning attorney is essential.
Our firm helps Illinois families understand their estate tax exposure and implement customized strategies to protect their wealth for the next generation. Whether you need a straightforward credit shelter trust or a comprehensive multi-strategy tax reduction plan, we can guide you through the options. Schedule a consultation to discuss your estate tax planning needs and take the first step toward protecting your family's legacy.