If you’ve done any estate planning in the last few years, there’s a good chance the conversation centered on the federal estate tax exemption. That number is high enough right now that most families never get close to it, so a lot of people finish those planning conversations feeling like the issue is settled. For Illinois residents, though, there’s a second threshold that rarely gets the same attention, and it can change the math considerably.
The Illinois estate tax, separate from the federal one, and it starts at $4 million. That is not $4 million in unusually concentrated wealth. For an Illinois resident in Metro East with a home, a retirement account, some life insurance, and the value of their business, $4 million shows up more often than most people expect. It can also reach a nonresident who owns Illinois real estate or tangible property here.
What Is the Illinois Estate Tax Exemption in 2026?
Illinois sets its estate tax threshold at $4 million, and the Illinois Attorney General administers the tax rather than the Department of Revenue. The tax is not a simple percentage applied to the estate. Illinois uses what its own guidance calls an interrelated calculation, run off the tentative taxable estate and adjusted taxable gifts, which is why the Attorney General publishes an online calculator instead of a rate table.
For 2026, the federal estate tax basic exclusion is $15 million per individual, up from $13.99 million in 2025, per the IRS. A married couple may be able to use both exclusions, but the $30 million figure that gets quoted around is not automatic. Portability generally requires a timely federal estate tax return with the election made after the first spouse’s death, and earlier taxable gifts affect what is left to use. The gap between $4 million and $15 million is exactly where the Illinois trap lives. A family whose estate is comfortably below the federal radar can still owe a meaningful amount of Illinois estate tax.
How the Illinois Estate Tax Is Calculated and Filed
Here is the part that surprises people. Illinois treats the $4 million as a taxable threshold rather than a credit against the tax, so it is not an amount you simply subtract before applying a rate. Once an estate crosses the line, the whole estate goes into the calculation, along with any adjusted taxable gifts.
That does not mean an estate barely over $4 million gets a large bill. In the Attorney General’s own published examples, a decedent with an estate of $3,000,100 and adjusted taxable gifts of $1,000,000 owes $28 in Illinois estate tax. The number climbs quickly from there. An estate of $5,000,000, all of it Illinois property, produces $285,714 of Illinois estate tax and no federal estate tax at all. That is the shape worth planning around: a threshold you cross quietly, followed by a steep ramp.
The return is Form 700, filed with the Illinois Attorney General’s office, and the tax is due nine months after the date of death. Extensions are available on application to the Attorney General, and they can cover filing, payment, or both. To request one you file Form 700-EXT, or a written explanation of why it is impossible or impractical to file and/or pay on time, within nine months of the date of death. The Attorney General also recognizes federal extensions. One quirk worth knowing: the return goes to the Attorney General, but the money goes to the Illinois State Treasurer, on the Treasurer’s own estate tax payment form.
The Illinois return stands on its own. It does not depend on whether a federal estate tax return (Form 706) is required, so an estate well below the federal exclusion still files in Illinois if its gross value exceeds $4 million once adjusted taxable gifts are added in.
One more feature catches married couples off guard. Illinois does not allow portability between spouses the way the federal system does. At the federal level, a surviving spouse can inherit the unused portion of a deceased spouse’s exemption. Illinois has no equivalent. Each estate is measured against its own $4 million threshold, which makes titling of assets and trust planning matter a lot more at the state level.
Why $4 Million Is Closer Than Most Illinois Business Owners Think
The $4 million figure sounds like a wealthy person’s problem until you add up what a typical Metro East business owner actually has. A home in the Edwardsville or O’Fallon area. A retirement account that has been growing for 20 or 30 years. A life insurance policy held personally, which counts toward the estate at full face value. Then there’s the business itself.
Business valuations can be surprisingly high even for modest-looking operations, and a profitable closely held service business often appraises at a multiple of its annual earnings. Add that to a house, retirement accounts, and life insurance, and the $4 million line is not far away at all.
This is one reason business owners in particular need tax planning that accounts for both the federal and the Illinois rules, not just whichever one came up in a past conversation.
Does Illinois Allow a Marital Deduction for Estate Tax?
Yes. Illinois follows the federal unlimited marital deduction, so assets passing to a surviving spouse are generally not subject to Illinois estate tax at the first spouse’s death. The catch is that this defers the tax, it does not erase it. When the surviving spouse later passes, their estate is measured against the same $4 million threshold, and because Illinois has no portability, the survivor is working with only one $4 million threshold, not two.
This is where credit shelter trusts and marital trusts become relevant for Illinois residents. A properly structured credit shelter trust, sometimes called a bypass trust or an AB trust, can help make use of each spouse’s own $4 million Illinois threshold by routing assets through the trust rather than passing them outright to the survivor, though the result depends on how the trust is drafted, funded, and titled. Without that kind of structure, the second estate can end up well above the available Illinois threshold.
Illinois also allows its own QTIP election, made on a timely filed Form 700, separate from and in addition to any federal QTIP election. That matters most when an estate sits below the federal filing threshold but above the Illinois one. The Attorney General’s published examples include a $13,610,000 estate with a surviving spouse and an Illinois QTIP election of $9,610,000 that owes no Illinois estate tax at all.
What Assets Are Included in an Illinois Estate?
For Illinois estate tax purposes, the gross estate includes essentially everything the deceased owned or held an interest in at death. That covers real property in Illinois, bank and investment accounts, retirement accounts such as an IRA, 401(k), or SEP, life insurance policies owned by the deceased, business interests, and jointly held property, which is included under the federal rules, generally meaning half of a qualified joint interest between spouses and the full value of other joint property unless the surviving owner’s own contribution can be shown. Assets in a revocable living trust count too, because the deceased kept control during their lifetime.
Life insurance is one of the most commonly misunderstood items in estate planning. Proceeds are included in the gross estate if they are payable to the estate, or if the deceased held any incidents of ownership in the policy. Incidents of ownership means rights like the power to change the beneficiary, cancel or assign the policy, or borrow against it, so whose name sits on the policy is not the only test. A policy with a $1 million death benefit can push an otherwise below-threshold estate over the $4 million line in Illinois, even though the beneficiaries receive the money income-tax-free. Moving a policy into an irrevocable life insurance trust, sometimes called an ILIT, is one technique used to address this, though it means giving up control, and transferring an existing policy within three years of death can pull the proceeds back into the gross estate.
How Federal Law Changes Affect Your Illinois Exposure
The elevated federal estate tax exemption came from the 2017 tax law, and under that law it was set to drop by roughly half after 2025. The One Big Beautiful Bill Act of 2025, signed in July 2025, changed that outcome. It set the federal exemption at $15 million per person for 2026, with inflation adjustments going forward, per the IRS.
Illinois, meanwhile, has not changed its $4 million threshold in years, and the state figure is not indexed to inflation. So the gap between the federal exemption and the Illinois threshold has widened over time, and it is likely to keep widening. Plans built around older federal numbers may leave unnecessary Illinois exposure on the table, and plans written before the federal law settled for 2026 are worth a fresh look to see whether the state-level strategy still holds up.
Planning Options That Reduce Illinois Estate Tax
Several strategies help Illinois residents manage estate tax exposure at the state level. Credit shelter trusts, as noted above, are the most common route for married couples. For business owners, a qualified appraisal and valuation discounts on closely held business interests can reduce the estate value used in the calculation, though these need proper documentation and hold up better when they are conservative. Irrevocable life insurance trusts address the problem of a large policy inflating the gross estate.
Annual gifting is another tool. The federal annual gift tax exclusion for 2026 is $19,000 per recipient, per the IRS, and gifts within that limit generally do not use up lifetime exclusion or require a gift tax return.
Illinois has no separate gift tax, but that does not mean gifts disappear from the Illinois math. Adjusted taxable gifts are added back when Illinois determines both the filing threshold and the tax, on line 4 of Form 700. A steady annual-exclusion gifting program still helps, because it moves property and its future appreciation out of the estate, but larger taxable gifts should be modeled for Illinois as well as for federal purposes.
Where Thompson Flaherty Fits Into This Conversation
Estate planning involves attorneys, CPAs, and often financial advisors working together, and the tax side of that conversation is where we come in. We can help you see where your estate stands relative to the Illinois $4 million threshold, how your business interests factor into the calculation, and what the exposure looks like under different scenarios. We work with estate planning attorneys across Metro East Illinois and the St. Louis area, and coordinating the tax planning with the legal structure is something we do regularly.
If you’ve done federal estate planning but haven’t looked at the Illinois side in a while, or if you’re a small business owner who has never run the numbers at all, the right time to look is not when the estate is being administered. It’s now, while there’s still room to structure things.
Reach out to the team at Thompson Flaherty and we’ll walk through where things stand.
