Illinois Estate Tax: $4M Exemption Plus Graduated Rates

Illinois is one of 12 states (plus the District of Columbia) that impose a state-level estate tax. Its $4 million exemption threshold, codified in 35 ILCS 405/3, sits in the middle of the state-tax range: lower than Connecticut ($13.99M) and New York ($7.16M), higher than Massachusetts ($2M) and Oregon ($1M). The Illinois tax is the binding constraint for most Chicago-area estates because the federal exemption ($13.99M per individual in 2026) is more than triple the Illinois threshold. A $6 million estate owes $0 in federal estate tax and approximately $284,000 in Illinois estate tax. For households in this range, Illinois planning is the only planning that matters.

This guide walks the Illinois estate tax structure under 35 ILCS 405, the graduated rate table from the Illinois Department of Revenue Form 700 instructions, the lack of portability and its implications for married couples, and the five core planning tools (marital deduction, charitable deduction, credit shelter trust, ILIT, and lifetime gifting). The conclusion: for couples with $4M to $20M in combined assets, a credit shelter trust funded at the first death can eliminate the Illinois estate tax entirely without affecting federal estate planning.

The Illinois estate tax structure under 35 ILCS 405

Illinois imposes its estate tax under the Illinois Estate and Generation-Skipping Transfer Tax Act, 35 ILCS 405. The mechanics:

• Filing threshold: $4,000,000 of gross estate value (after deductions). Estates below this amount have no filing requirement.
• Tax base: the entire taxable estate, not just the excess above $4 million. An estate of $4,000,001 owes tax calculated on $4,000,001, not on $1.
• Rate structure: graduated, derived from the pre-2005 federal state death tax credit under former IRC Section 2011. Effective rates climb from approximately 0.8 percent on small estates just over $4 million to a top marginal rate of 16 percent on estates above $10.04 million.
• Tax form: Illinois Form 700, filed with the Illinois Department of Revenue. Due 9 months after death, same deadline as federal Form 706.
• Gross estate inclusion: follows the federal definition under IRC Section 2031 — all property in which the decedent had an ownership interest at death, plus revocable trusts, life insurance proceeds owned by the decedent, and assets transferred within 3 years of death under IRC Section 2035.
• Deductions: 35 ILCS 405/4 allows the same categories as federal: debts, funeral expenses, administration costs, unlimited marital deduction (for transfers to US-citizen spouse), unlimited charitable deduction, and the credit for state death taxes paid to other states on out-of-state property.

The graduated rate table: effective rates at each estate size

The Illinois Department of Revenue publishes the rate table in the Form 700 instructions. Approximate effective rates:

• $4,000,001 estate: approximately $32,000 (effective rate 0.8 percent)
• $5,000,000 estate: approximately $158,000 (effective rate 3.2 percent)
• $6,000,000 estate: approximately $284,000 (effective rate 4.7 percent)
• $7,000,000 estate: approximately $420,000 (effective rate 6.0 percent)
• $8,000,000 estate: approximately $560,000 (effective rate 7.0 percent)
• $9,000,000 estate: approximately $720,000 (effective rate 8.0 percent)
• $10,000,000 estate: approximately $940,800 (effective rate 9.4 percent)
• $15,000,000 estate: approximately $1,720,000 (effective rate 11.5 percent)
• $20,000,000 estate: approximately $2,520,000 (effective rate 12.6 percent)
• Top marginal rate (estates above $10.04M): 16 percent

The cliff at $4 million is the most critical planning point. An estate of $3,999,999 owes $0. An estate of $4,000,001 owes approximately $32,000. The marginal rate at the threshold is effectively infinite, so estates within $200,000 to $500,000 of $4 million should aggressively reduce gross estate through lifetime gifts, ILITs, and credit shelter planning to get below $4M.

No portability: why this matters for married couples

The federal estate tax allows portability of the deceased spouse's unused exemption (DSUE) under IRC Section 2010(c)(4). If one spouse dies with a $4M estate and a $13.99M federal exemption, the surviving spouse can claim the unused $9.99M, effectively giving them a $23.98M federal exemption. Illinois does not allow this. Each spouse has a $4M Illinois threshold, and if the first spouse to die leaves everything to the surviving spouse via the unlimited marital deduction, the first spouse's threshold is wasted.

Worked example: David and Linda live in Wilmette, Illinois. Combined assets: $8 million, held jointly ($4 million attributable to each spouse). David dies first with a will leaving everything to Linda.

• David's Illinois estate tax: $0 (unlimited marital deduction)
• Linda's estate at her later death: $8 million (assuming no growth or spend-down)
• Linda's Illinois estate tax: approximately $560,000
• Combined Illinois estate tax: $560,000

Alternative with credit shelter trust:

• David's estate: $4M into the credit shelter trust (using his $4M Illinois threshold), $0 owed
• Linda's estate at her later death: $4 million (trust assets are not included in her estate)
• Linda's Illinois estate tax: $0 (her $4M threshold covers the $4M)
• Combined Illinois estate tax: $0

Savings from the credit shelter trust: $560,000. The trust costs approximately $5,000 to $15,000 to draft and administer. The ROI on the planning is dramatic for couples in this range.

Worked example: $6 million Illinois estate at single decedent

Maria, age 76, is widowed and lives in Naperville. Her estate consists of:

• Primary residence: $1,400,000 (purchased for $475,000 in 1998)
• Taxable brokerage account: $1,800,000 (cost basis $700,000)
• Traditional IRA: $1,500,000
• Roth IRA: $400,000
• Life insurance death benefit: $500,000 (owned by Maria)
• Bank accounts and personal property: $400,000
• Total gross estate: $6,000,000

Illinois estate tax (no planning)

Maria's $6 million gross estate, with no additional deductions beyond funeral and administration costs (estimated $50,000), produces an Illinois taxable estate of approximately $5,950,000. The graduated rate table applied to this amount produces approximately $278,000 in Illinois estate tax. Due 9 months after death on Illinois Form 700.

Federal estate tax

Maria's $6 million estate is well below the federal $13.99 million exemption in 2026. Federal estate tax: $0. The Illinois estate tax paid would be deductible on the federal return under IRC Section 2053 as a debt of the estate if federal tax were owed, but it is not in this case.

Step-up in basis: the offsetting silver lining

Under IRC Section 1014(a), Maria's heirs receive a full step-up in basis on her capital assets included in the federal gross estate. The house basis resets from $475,000 to $1,400,000. The brokerage account basis resets from $700,000 to $1,800,000. If her children sell these assets immediately after inheriting, they pay $0 in capital gains tax on the $2,025,000 of combined unrealized gains ($925,000 on the house plus $1,100,000 on the brokerage).

Federal LTCG rate at 20 percent plus NIIT 3.8 percent equals 23.8 percent. Illinois conforming income tax on capital gains: 4.95 percent. Combined rate on long-term gains: approximately 28.75 percent. Tax savings from the step-up: $2,025,000 multiplied by 28.75 percent equals approximately $582,000. The $278,000 Illinois estate tax is painful, but the $582,000 in income tax savings from the step-up more than offsets it.

The IRA: no step-up, ordinary income to heirs

Maria's $1.5 million traditional IRA does not receive a step-up. Under the SECURE Act 10-year rule (IRC Section 401(a)(9)(H)), her non-spouse beneficiaries must distribute the entire IRA within 10 years of her death. Distributions are taxed as ordinary income to the beneficiaries. If her children are in the 24 percent federal bracket plus 4.95 percent Illinois bracket, the $1.5 million IRA produces approximately $435,000 in combined income tax over the 10-year distribution period.

The IRA is included in Maria's gross estate for Illinois estate tax purposes (contributing to the $6M total) but cannot be reduced by the Illinois estate tax attributable to the IRA. Illinois estate tax does not qualify for the IRC Section 691(c) federal income tax deduction that federal estate tax provides for income in respect of a decedent. The IRA is effectively double-taxed under Illinois rules.

Planning strategies for Illinois residents

Strategy 1: Credit shelter trust (bypass trust) for married couples

For married couples, the credit shelter trust is the foundational Illinois estate tax planning tool. At the first spouse's death, up to $4 million is directed into an irrevocable trust for the surviving spouse's benefit. The trust assets generate income for the survivor under HEMS (health, education, maintenance, support) ascertainable standards under IRC Section 2041(b)(1)(A), and principal can be distributed to the survivor under similar standards without inclusion in the survivor's estate.

Result for couples with $4M to $8M combined: both spouses' $4M thresholds are used, sheltering up to $8M from Illinois estate tax. For couples with $8M to $12M, the credit shelter trust shelters $4M while the surviving spouse's estate remains exposed on $4M to $8M; lifetime gifting and ILIT strategies handle that exposure. Trust drafting cost: $5,000 to $15,000 depending on complexity.

Strategy 2: Irrevocable life insurance trust (ILIT)

Life insurance proceeds are included in the decedent's gross estate under IRC Section 2042 if the decedent owned the policy or had incidents of ownership. Maria's $500,000 policy inflates her gross estate from $5.5M to $6M, adding approximately $50,000 to $60,000 in Illinois estate tax.

Transferring the policy to an irrevocable life insurance trust (ILIT) removes the proceeds from the gross estate. The 3-year lookback rule under IRC Section 2035 requires the ILIT to be established at least 3 years before death, and annual premium payments to the ILIT must be structured as gifts qualifying for the annual gift tax exclusion ($19,000 per beneficiary in 2026) using Crummey withdrawal powers. For Maria, moving the $500,000 policy to an ILIT reduces her gross estate to $5.5M and her Illinois estate tax from approximately $278,000 to $218,000 — a savings of approximately $60,000.

Strategy 3: Lifetime gifting under the federal annual exclusion

Illinois does not impose a gift tax. The federal gift tax under IRC Section 2501 applies, but annual exclusion gifts ($19,000 per recipient in 2026) are completely free of gift tax and reduce the gross estate dollar-for-dollar. A couple with three children, three children-in-law, and six grandchildren can give away $456,000 per year ($19,000 multiplied by 12 recipients multiplied by 2 spouses) without touching their lifetime exemption.

Maria, with a $6M estate, could reduce her gross estate by $114,000 per year (assuming 6 recipients at $19,000 each). In 5 years, that is $570,000 removed from the estate, bringing it to $5.43M and reducing Illinois estate tax from $278,000 to approximately $214,000.

Critical caveat: gifts of appreciated assets carry over the donor's cost basis under IRC Section 1015 — the recipient does not get a step-up. Maria should gift cash, recently purchased securities (high basis), or assets she would otherwise sell during her life. Highly appreciated long-held positions should pass at death to benefit from step-up.

Strategy 4: Roth conversions

Roth conversions do not reduce gross estate value (the Roth IRA is still in the estate), but the income tax paid on the conversion does reduce the estate (the tax payment leaves the estate). More importantly, Roth conversions shift the character of inherited retirement assets from ordinary-income taxable (traditional IRA) to tax-free (Roth IRA under IRC Section 408A(d)(1)).

For Maria, converting $300,000 of her traditional IRA to a Roth at the 24 percent federal bracket plus 4.95 percent Illinois bracket costs approximately $87,000 in income tax. Her gross estate is reduced by $87,000 (from $6M to $5.91M), saving roughly $9,000 to $11,000 in Illinois estate tax. The larger benefit goes to her heirs: the $300,000 in Roth distributes tax-free over 10 years, saving approximately $87,000 in income tax they would have owed on traditional IRA distributions.

Strategy 5: Qualified personal residence trust (QPRT)

For Illinois homeowners whose primary residence represents a large share of their estate, a QPRT under IRC Section 2702 can freeze the value of the home for estate tax purposes. The grantor transfers the home to an irrevocable trust, retaining the right to live in it for a specified term (e.g., 10 years). If the grantor survives the term, the home is removed from the estate at its value on the date of transfer, not the date of death.

Trade-off: if the grantor dies during the QPRT term, the home is pulled back into the estate at full date-of-death value under IRC Section 2036. The QPRT works best for grantors in their 60s or early 70s with a long actuarial life expectancy. For a 76-year-old like Maria, the risk of dying during a 10-year QPRT term is meaningful, reducing the strategy's appeal.

Federal-state interaction: when both taxes apply

For Illinois estates above the federal $13.99 million exemption (2026), both Illinois and federal estate tax apply. The Illinois tax paid is deductible on the federal Form 706 under IRC Section 2053 as a debt of the estate, partially offsetting the federal liability. For a $20 million Illinois estate:

• Illinois estate tax: approximately $2,520,000
• Federal taxable estate after IL tax deduction: $20,000,000 minus $2,520,000 minus $13,990,000 federal exemption equals $3,490,000
• Federal estate tax at 40 percent on $3,490,000 equals $1,396,000
• Combined estate tax: approximately $3,916,000 (effective rate 19.6 percent)

For estates in this range, the credit shelter trust becomes even more valuable because it shelters $4M from both state and federal tax. Federal portability handles the federal side ($27.98M combined exemption for a couple), but Illinois does not recognize portability, so the credit shelter trust is the only way to use both spouses' $4M Illinois thresholds.

Key takeaways

• Illinois imposes an estate tax under 35 ILCS 405 on estates exceeding $4 million. The tax applies to the entire estate from dollar one, not just the excess. An estate of $4,000,001 owes approximately $32,000.
• Graduated rates run from approximately 0.8 percent on small estates just over $4M to a top marginal rate of 16 percent on estates above $10.04 million. A $6 million estate owes approximately $284,000.
• Illinois does not recognize estate tax portability between spouses. Married couples must use a credit shelter trust at the first death to preserve both spouses' $4M thresholds. Without one, the first spouse's threshold is wasted.
• The federal step-up in basis under IRC Section 1014(a) applies to all assets in the gross estate regardless of whether federal estate tax is owed. Heirs receive a new cost basis at fair market value, eliminating unrealized capital gains.
• Traditional IRAs are double-taxed in Illinois estates: included in the gross estate for estate tax purposes (no IRC Section 691(c) deduction available against Illinois tax) and taxed as ordinary income to heirs under the SECURE Act 10-year rule.
• Core planning tools: credit shelter trust, ILIT for life insurance, lifetime gifting under the federal $19,000 annual exclusion, Roth conversions, and QPRTs for homeowners with long actuarial life expectancy.
• For estates between $4M and $13.99M, only Illinois estate tax applies. For estates above $13.99M, both federal and Illinois tax apply, with Illinois tax deductible on the federal Form 706 under IRC Section 2053.