The Illinois estate tax does not work the way the federal one does. The gap can cost a family more than $600,000 at the second death, and the exposure can often be reduced by how the documents are structured.
Most affluent Illinois families assume the 2026 federal estate tax exemption of $15 million per person protects them. For federal purposes, it usually does. Illinois is a separate problem. The state taxes estates above $4 million, that figure has not moved since 2013, and it is not indexed for inflation. The gap between the two systems now runs above $11 million per person, and it widens every year. A family can owe nothing to the IRS and still hand the State of Illinois a six-figure check before heirs receive anything.
The part that catches people is what the Illinois exemption does at the first death. It is not portable between spouses. Without the right structure, half of a married couple’s combined shelter disappears the day the first spouse dies. What follows is how the rule works, a hypothetical example of what it costs, and the planning that prevents it.
The $4 million threshold, frozen since 2013
Illinois raised its exemption in steps: $2 million, then $3.5 million for deaths in 2012, then $4 million for deaths on or after January 1, 2013. It has stayed at $4 million ever since. Unlike the federal exemption, which the IRS adjusts upward for inflation each year, the Illinois figure is fixed by statute under the Illinois Estate and Generation-Skipping Transfer Tax Act (35 ILCS 405). Had it tracked inflation from 2013, it would sit above $5 million today. It does not.
Two features make the Illinois tax sharper than families expect. First, the $4 million line is a threshold, not a clean deduction applied against the top of the estate. Once an estate crosses it, the tax is computed under the old state death tax credit table, and the first dollars above $4 million carry a steep marginal cost. An estate of $4.1 million owes roughly $28,571. The schedule produces effective rates that climb toward 16% as the estate grows. Second, Illinois adds back lifetime taxable gifts when deciding whether you are over the line, even though the state imposes no gift tax of its own.
Nonportability, the rule that quietly doubles the bill
Federal law lets a surviving spouse keep the deceased spouse’s unused exemption. The executor files a Form 706, claims the deceased spousal unused exclusion, and the survivor can shelter both exemptions, up to $30 million for a couple in 2026. This is portability.
Illinois has no equivalent. Each spouse has a $4 million exemption, and if the first spouse to die does not use it, it is gone. There is no election, no form, no carryover. For a couple that simply leaves everything to each other, this is the difference between sheltering $8 million and sheltering $4 million.
A hypothetical example
Now change one thing: the documents. Suppose the same plan directs that, at the first death, $4 million funds a credit shelter trust (also called a bypass trust) for the surviving spouse’s benefit, rather than passing outright. The survivor can still receive income and, within limits, principal from that trust. The $4 million simply is not part of the survivor’s taxable estate at the second death.
Same assets, same family, same total available for the survivor during life. The only difference is how the plan is written. Figures are estimates under the Illinois Attorney General’s calculation method and should be confirmed for any specific estate.
Fixing it inside Illinois law
For families who intend to remain Illinois residents, the work is structural, not exotic. Each of these tools carries tradeoffs, including administration costs, reduced control over the assets, and, in some cases, the loss of a step-up in cost basis at the second death. The right structure depends on the family’s facts.
Credit shelter (bypass) trust. The core move. It captures the first spouse’s exemption that non-portability would otherwise waste. Most plans drafted before portability existed used a version of this automatically. Many plans written after 2011 dropped it in favor of simple portability, which Illinois does not honor. Plans built around federal portability alone are exactly the ones exposed in Illinois.
Illinois QTIP election. Illinois permits a state-only QTIP election. It gives the estate flexibility to decide, after the first death, how much to shelter immediately versus defer to the second death, so the plan can adapt to the actual numbers and asset mix at the time.
Irrevocable life insurance trust (ILIT). Illinois includes life insurance you own in your taxable estate. A policy with a large death benefit can push an otherwise modest estate over $4 million. Holding the policy in an ILIT keeps the proceeds out of the estate. For families counting insurance as part of their legacy, this is often the largest avoidable inclusion.
Lifetime gifting. Illinois has no gift tax, which makes it one of the better states for moving assets out of the estate during life. The caveat: Illinois adds federally reportable taxable gifts back when testing the $4 million threshold, so gifting reduces the estate but does not disappear from the calculation the way some assume. Done deliberately, it still removes future growth and income from the taxable estate.
The other option, leaving Illinois
Some families conclude the cleaner answer is to change their legal residence to a state with no estate tax. Florida, Tennessee, and Texas are common destinations. For a family already spending meaningful time outside Illinois, this can remove the state estate tax on most of the estate.
One caveat matters. Illinois real estate and tangible property located in Illinois remain subject to Illinois estate tax regardless of where you are domiciled. A nonresident who keeps a Chicago condo, Illinois farmland, or a lake property still files an Illinois return on that property’s value. Changing residence is a real strategy, but it carries documentation requirements, and for families with roots and real property in the state it rarely solves the issue on its own.
Do not wait for the legislature
There is recurring talk in Springfield about raising the exemption. None of it has become law. Bills to double the exemption to $8 million, to restructure the tax with new graduated rates, and to carve out farm estates at a $6 million threshold have all been introduced in recent sessions and have all stalled or died in committee. The exemption has not increased in over a decade. Planning that assumes relief is coming is planning on a hope.
What to do
If your estate, counting your home, retirement accounts, business interests, and any life insurance you own, is approaching or above $4 million, two questions decide your exposure:
- Does your plan capture both spouses’ Illinois exemptions, or does it rely on portability that Illinois ignores?
- Is your life insurance inside your taxable estate or outside it?
Plans written for federal portability alone, and plans that have not been reviewed since the children were young, are the ones that produce the surprise bill. A review against current Illinois law often identifies the gap, and for larger estates the potential savings can reach into the hundreds of thousands of dollars depending on the facts.
Ftacek Financial Services works with high-net-worth families on estate and wealth-transfer planning, coordinating family office services alongside your estate attorney and CPA. If you would like your plan reviewed against current Illinois law, we can start with a conversation.
This article is for educational purposes only and reflects our understanding of Illinois and federal estate tax law as of June 2026. It is not legal or tax advice and is not personalized investment advice. The example and dollar figures are hypothetical and are shown only to illustrate how the rules can apply. They are not a projection of results for any specific person. Consult your estate planning attorney and tax professional before acting. Advisory services offered through United Advisor Group, a Registered Investment Adviser. Ftacek Financial Services, LLC, (615) 591-2490.