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Illinois remains one of the few states that still imposes its own estate tax, and its rules are very different from the federal system’s.
The federal estate tax exempts $15 million per person, or $30 million per married couple. Illinois uses a much lower $4 million estate tax threshold per married couple.
The word “threshold” matters: It’s not a true exemption. If an estate is valued at $4 million or less, there is no Illinois estate tax. But if the value exceeds $4 million by even a single dollar, Illinois will tax the entire estate, not just the amount above the threshold.
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This is known as the Illinois “cliff tax.” At an estate value of exactly $4 million, the tax is zero. But at $4 million plus $1, the entire estate is taxable.
An estate just barely above the threshold, at, say, $4.1 million, might trigger about $200,000 to $240,000 of Illinois estate tax under current estimates, even though it exceeded the threshold by only $100,000. (This example is for illustration only.)
Many Illinois residents find themselves approaching the threshold without realizing it. After decades of saving, home appreciation and life insurance growth, it is common for ordinary families to exceed $4 million.
For example, a married couple with a $1.2 million home, $2.4 million in retirement savings and a $1 million life insurance policy (which would be taxable in certain circumstances) would be over the threshold, even though few people in that position would describe themselves as very wealthy.
Avoiding the loss of a second threshold
A further complication arises with married couples. Under federal law, the unused portion of the first spouse’s exemption automatically transfers to the surviving spouse.
Illinois does not allow this portability. If nothing is done before the first spouse dies, the unused portion of the first spouse’s threshold is permanently lost.
In effect, many married couples unintentionally end up with only a single $4 million threshold rather than two.
That is why a credit shelter trust — sometimes called a bypass trust — could be the most important estate planning tool in Illinois. A properly drafted estate plan can preserve the first spouse’s threshold and keep it available for the surviving spouse.
When implemented correctly, this strategy may effectively increase the Illinois protection to about $8 million per married couple, not just $4 million. Without planning, the second threshold disappears.
A simple will does not accomplish this. A will directs distribution, but it does not preserve the first spouse’s threshold. A revocable living trust with Illinois-specific estate tax provisions, or a credit shelter trust triggered at the first death, is necessary for married couples approaching or exceeding the Illinois threshold.
It is also important to know what Illinois counts in determining whether the threshold has been exceeded. The state includes homes, investment property, bank and brokerage accounts, retirement accounts, business interests, farmland, personal property and life insurance death benefits if the insured owns the policy.
A family who appear “comfortable but not wealthy” during life could find themselves well into taxable territory at death.
Strategies to reduce or manage Illinois estate tax exposure
Once the Illinois threshold is crossed, the state applies a progressive estate tax rate that ranges up to the midteens. That is why planning and timing matter so much.
Life insurance is particularly critical, because a policy owned by the insured is part of the taxable estate and may push the estate over the threshold instantly at death. An irrevocable life insurance trust (ILIT) can own the policy instead, keeping the death benefit outside the taxable estate.
Charitable strategies can also help reduce the taxable estate while supporting causes families care about. Donor-advised funds (DAFs), charitable trusts and direct bequests can shift assets away from the taxable estate.
Illinois does not impose a separate state-level gift tax, so lifetime gifting may be an effective way to reduce exposure over time.
Relocation is sometimes worth considering, because states like Florida, Tennessee and Texas impose no state estate tax. But establishing domicile requires more than a change of address, and Illinois property or business ownership may still create planning obligations.
Always seek legal counsel regarding domicile and state law nuances.
Timing matters more than you think
Perhaps the most important point is timing. The moment of the first spouse’s death determines whether the second threshold will be preserved or lost. Planning must be done in advance.
Even families currently worth well under $4 million should remember that assets compound. Even if your estate is only $1 million today, it could be $4 million or more 20 years from now due to investment growth and rising property values.
Without proactive planning, that growth could push an otherwise modest estate into taxable territory.
The Illinois estate tax is not an issue only for the wealthy. It increasingly affects middle- and upper-middle-income Illinois families who have saved responsibly, purchased insurance and owned real estate for many years.
Understanding that Illinois uses a $4 million per couple threshold — not a true exemption — and that crossing the threshold by even $1 means Illinois will tax the entire estate, is essential.
With thoughtful planning, particularly via a credit shelter trust, many couples can effectively secure about $8 million of protection and keep substantially more of their estate for spouses, children and charitable causes rather than sending an unnecessary share to the state.
This article is for informational purposes only and should not be considered tax or legal advice. Individuals should consult qualified legal and tax professionals regarding their specific circumstances. The hypothetical examples provided are illustrative only and do not guarantee or predict any specific outcome.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
