Illinois Estate Tax: Why the $4 Million Exemption Matters More Than You Think

Most families I talk with have stopped worrying about estate tax, and federally that's reasonable. The 2026 basic exclusion is $15 million per person, indexed for inflation after 2026 rather than scheduled to shrink.

Illinois is a different story. Illinois has its own estate tax with a $4 million exclusion. It isn't indexed for inflation, and it isn't portable between spouses. A married couple can be nowhere near the federal limit and still leave their children an Illinois tax bill in the hundreds of thousands of dollars. Usually the cause isn't extraordinary wealth. It's a plan that ignored the first death.

Two exemptions, very different numbers

The federal exclusion for 2026 is $15 million. A married couple can generally protect $30 million, because federal law lets a surviving spouse claim the unused exclusion of the spouse who died first. That's called "portability," and it requires filing a federal estate tax return at the first death.

Illinois's exclusion is $4 million per person, and the Illinois Attorney General states plainly that federal portability doesn't apply to the Illinois tax. Whatever part of the first spouse's $4 million goes unused is simply lost for Illinois purposes.

And $4 million is reached sooner than people expect. Your taxable estate generally includes what you own or control at death:

• IRAs and 401(k)s at full value, even though income tax hasn't been paid on them
• Your home and other real estate, including your share of joint property
• Taxable investment and bank accounts, and business interests
• Life insurance on your life if you own the policy, hold other rights over it, or it's payable to your estate

That last item surprises people. A $1 million policy you own can count dollar for dollar toward the Illinois threshold.

How the tax is calculated, without the scare stories

You'll sometimes read that Illinois has a "cliff," meaning that going $1 over $4 million exposes the whole estate to tax. That isn't how it works. The $4 million is a threshold, not a credit, and Illinois computes its tax with a formula tied to an old federal credit, which is why the results don't follow a simple bracket. Here are figures from the Attorney General's official calculator, with no prior taxable gifts:

There's no cliff, but there is a steep ramp. The first $1 million over the threshold produces about $285,700 of tax, roughly 28.6% of that excess. That's why planning that keeps each spouse's taxable estate at or under $4 million can be worth so much.

An estate whose gross value plus adjusted taxable gifts exceeds $4 million must file an Illinois Form 700 with the Attorney General, even if deductions bring the tax to zero. The tax is due nine months after death.

A hypothetical example: a $6 million Illinois couple

Mark and Linda are in their late 60s. Between them they have:

• Mark's IRA: $1.8 million, with Linda as beneficiary
• Linda's IRA: $400,000, with Mark as beneficiary
• Their home, owned jointly with right of survivorship: $1.2 million
• A brokerage account, owned the same way: $1.6 million
• A $1 million life insurance policy on Mark, owned by Mark, with Linda as beneficiary

That's about $6 million once the policy pays out. Federally, they're far below the threshold. Assume both have simple wills leaving everything to each other, and that's how it's titled today.

Plan A: leave things as they are. Say Mark dies first. Everything passes to Linda: the joint assets automatically, the IRA and insurance by beneficiary designation. Property passing outright to a spouse qualifies for the marital deduction, so there's no Illinois or federal estate tax at Mark's death. But Mark's $4 million Illinois exclusion went unused, and it doesn't carry over.

When Linda later dies with the same $6 million (ignoring growth and spending), her estate owes $456,071 in Illinois estate tax under the Attorney General's calculator. There's no federal tax.

Plan B: use the first spouse's exclusion. Now suppose Mark's estate plan includes a credit shelter (or "bypass") trust. At his death, assets go into a trust that can provide for Linda (income and, often, principal for her health and support) but, when properly drafted, isn't counted in her estate when she dies.

Having the trust in the documents isn't enough. A trust only gets assets that actually flow into it, and with the ownership above, nothing would. Joint property goes straight to the survivor, and an IRA or policy follows its beneficiary form. For Plan B to work, three things have to be done while Mark is alive:

• The documents have to create the credit shelter trust, typically inside Mark's revocable trust.
• Mark's half of the house and brokerage account has to be retitled out of joint ownership and into his revocable trust.
• The life insurance beneficiary has to be changed from Linda to that trust.

If any of those steps is skipped, the affected assets pass to Linda outright, and the result drifts back toward Plan A. With all three done, about $2.4 million goes into the credit shelter trust: $600,000 of the house, $800,000 of the brokerage account and the $1 million death benefit.

Mark's IRA can still go to Linda directly, preserving her ability to roll it over. Naming a trust as IRA beneficiary is possible but brings complicated distribution and income-tax rules.

Result: after the IRA passes to Linda under the marital deduction, Mark's Illinois taxable estate is about $2.4 million. His executor still files Form 700, because his gross estate tops $4 million, but no tax is due. Linda ends up owning about $3.6 million, so her estate owes nothing either. That's a difference of roughly $456,000 compared with Plan A.

Two caveats:

• Who dies first changes the math. If Linda dies first, she has only about $1.8 million in her name, including her IRA. Even if all of it is sheltered, Mark is left with about $4.2 million including the policy, which produces $57,143 of Illinois tax. Balancing ownership between spouses is part of the work.
• There's an income-tax tradeoff. Assets in a credit shelter trust generally don't get a new cost basis when the surviving spouse dies. If the holdings grow a lot during Linda's lifetime, the children inherit more capital gain.

The Illinois-only QTIP

When the first spouse's estate is larger than $4 million, Illinois lets the executor make a qualified terminable interest property (QTIP) election for Illinois purposes that is separate from the federal election. With a properly drafted marital trust, the executor can elect Illinois QTIP treatment for the amount above the exclusion, so the first estate owes no Illinois tax.

That defers the tax; it doesn't eliminate it. Elected property is included in the surviving spouse's estate and generally gets a new basis at that death. The value is flexibility: the executor decides how much to elect after the first death, with real numbers in hand. The trust has strict requirements, including paying all income to the surviving spouse for life, so this is drafting work for an Illinois estate attorney.

Gifting: no Illinois gift tax, but not a free pass

Illinois has no separate gift tax, so some people conclude they can simply give assets away before death. Partly true. Gifts within the federal annual exclusion, $19,000 per recipient in 2026, don't use any lifetime exclusion and aren't added back for Illinois.

Larger gifts are different. They're "taxable gifts" for federal purposes. In most cases that means filing a federal gift tax return and using part of your $15 million lifetime exclusion, not paying tax. Illinois then adds those adjusted taxable gifts back into its estate tax calculation. In the Attorney General's calculator, a $3 million estate with $3 million of prior taxable gifts produces $167,279 of Illinois tax. That's less than the $456,071 on a $6 million estate with no gifts, and growth on gifted assets after the gift happens outside your estate. But gifting has real limits:

• A gift is permanent. Money you give away isn't available if you later need it for long-term care or a longer retirement than you planned.
• Large gifts don't disappear from the calculation. They're added back, and they can create Illinois tax even for an estate under $4 million at death.
• Some gifts don't work close to death. Giving away a life insurance policy within three years of death generally pulls the death benefit back into your estate.
• Gifts carry your basis. Someone who receives a gift generally takes the giver's original cost basis. Someone who inherits generally gets a basis equal to the value at death.

That last point is easy to overlook. Giving away highly appreciated stock may trim the Illinois tax while handing your children a larger capital gains bill. Cash, or assets with little built-in gain, often make better lifetime gifts.

Estate tax and income tax are separate questions

Estate tax is paid by the estate, based on what you own at death. Receiving an inheritance generally isn't taxable income to the beneficiary. Income tax shows up later, and how much depends on the asset:

• Traditional IRAs and 401(k)s count in full for estate tax and don't get a step-up. The pre-tax dollars are taxed as ordinary income when beneficiaries withdraw them, and most non-spouse beneficiaries must empty the account within 10 years. A surviving spouse has more options, including rolling it over. Qualified Roth withdrawals are generally tax-free.
• Brokerage accounts and real estate generally get a new basis equal to their value at death, so gain built up during your lifetime isn't taxed when heirs sell. Only growth after death is.
• Income earned after death, such as dividends while the estate or a trust holds the assets, is taxable to the estate, the trust or the beneficiaries who receive it.

So the same $1 million can be worth very different amounts after tax depending on what it's held in, and strategies that reduce one tax can increase another. Not every trust solves the estate tax problem, either: a revocable living trust is still counted in your estate, and whether an irrevocable trust keeps assets out depends on how it's drafted and what rights you keep.

Coordinating the pieces

The most important decisions often have less to do with complicated tax rules than with making sure the plan actually works the way you intended: who will need the money, how much control the survivor should have, how retirement accounts will be withdrawn and taxed, and whether titles and beneficiary forms match the documents. Plenty of good trusts sit unfunded because an account stayed joint.

That's why this belongs in your broader retirement plan, with a qualified Illinois estate attorney drafting and implementing the documents. It's also worth watching Springfield. Bills introduced in 2025 and 2026 would have raised the Illinois exclusion or tied it to the federal amount with portability, but as of this writing none has been enacted. The $4 million, non-portable exclusion is current law.

If you'd like to look at how your accounts, beneficiary designations and estate documents fit together, you can reach me here.

This article is for general education only and isn't individualized tax or legal advice. Illinois estate tax figures come from the Illinois Attorney General's estate tax calculator for 2026 deaths, assume all assets are in Illinois, and are hypothetical. Estate planning documents should be prepared by a qualified Illinois estate attorney.