A retired couple in Naperville built up a household net worth of $4.2 million across forty working years — a paid-off house worth $850,000, a 401(k) and IRAs holding $2.4 million, brokerage and savings totaling $750,000, and a small commercial-rental LLC worth about $200,000. They owe no federal estate tax (the federal exclusion is well north of their estate). They owe approximately $280,000 in Illinois estate tax. The dollar that pushed them over $4 million is the dollar that triggered the cliff.

Illinois is one of twelve states that levy a state-level estate tax in 2026, and at $4 million it has the lowest exemption of any state that imposes the tax.1 The combination of a low exemption, no inflation indexing, and no portability between spouses creates a planning context that families in neighboring Indiana, Wisconsin, Missouri, and Iowa simply don’t face. For an adult child whose Illinois parent owns a home in a Chicago suburb, has done well in retirement accounts over the last fifteen years, and may own a closely-held business interest, the question isn’t whether state estate-tax planning matters — it’s whether it’s already been done. This piece walks through the cliff math, the spousal-planning gap, what counts in the Illinois estate, and the four planning moves that close the most exposure.

The cliff is real, and the math is brutal at the edge

The Illinois estate tax under 35 ILCS 405 uses a graduated rate schedule that begins at roughly 8% on the first dollar of taxable estate (the dollar above $4 million) and steps up to 16% at higher amounts.2But the most consequential feature isn’t the rate schedule — it’s the cliff effect produced by how the exemption interacts with the calculation.

The Illinois tax is computed as if the estate had no exemption, then a credit is applied for the first $4 million. For estates well above $4 million, this works as a simple exclusion. But for estates near $4 million, the marginal tax on the first dollar over is materially higher than the headline rate because the credit phases in the calculation. In practice:

The bracket math is the reason mid-six-figure spending on planning at the $4M–$5M level consistently pays for itself many times over. The marginal dollar lost to Illinois tax at the cliff edge is significantly higher than the same dollar lost in a state with a higher exemption or no estate tax at all.

The portability gap is the second cliff

The federal estate tax under IRC § 2010(c)(4) allows a surviving spouse to use a deceased spouse’s unused exemption (the “deceased spousal unused exclusion,” or DSUE). A widow inherits her late husband’s remaining federal exclusion automatically, with an election on the federal estate-tax return. The result: a married couple effectively has $27 million of federal exclusion as of 2024 with almost no planning required.

Illinois does not provide a comparable mechanism. A married couple in Illinois who owns everything jointly or who leaves everything to the surviving spouse uses $0 of the first-to-die spouse’s $4 million exclusion. When the second spouse dies, only one $4 million exclusion is available against the combined estate.3

What counts in the Illinois gross estate

The Illinois gross estate generally mirrors the federal gross estate under IRC § 2031 — with a handful of state-level deviations. For an Illinois decedent, the gross estate includes everything the decedent owned or controlled at death:

For Illinois estate-tax purposes, gifts made during life within the three years prior to death are added back into the gross estate (the federal three-year look-back also applies). Gifts made earlier — properly documented, with consideration paid for completed transfers — are outside the gross estate.

Who needs to file (and pay)

The Illinois estate-tax return (Form 700) is required for any estate where the gross estate plus adjusted taxable gifts exceeds $4 million.4 The return is filed with the Illinois Attorney General’s Estate Tax Section (not with the Department of Revenue, an unusual structure that reflects the Illinois statute’s drafting history). Filing is due nine months after the date of death, with one six-month extension available on request.

The return is functionally a copy of the federal Form 706 with an Illinois schedule attached computing the Illinois tax. Estates filing a federal 706 (because the gross estate exceeds the federal exclusion) attach a copy of the federal return. Estates that don’t require a federal return (which is most Illinois estates owing tax, given the high federal exclusion) prepare the Form 706 anyway as part of the Illinois filing.

The federal exclusion sunset complicates the picture

The Tax Cuts and Jobs Act of 2017 doubled the federal estate-tax exclusion through 2025, then sunsets it back to roughly the pre-TCJA level (approximately $7 million per individual in 2026, indexed).5 For Illinois families, the federal sunset matters because:

The four planning moves that close the most exposure

For Illinois families with combined net worth in the $3M–$10M range, four planning moves capture the bulk of the available estate-tax reduction. None requires extraordinary complexity; all require professional drafting and proper execution.

1. Credit-shelter trust (the spousal portability fix)

The credit-shelter trust — also called a bypass trust or A-B trust — is the workhorse fix for the Illinois portability gap. At the first spouse’s death, $4 million of assets are directed into an irrevocable trust that benefits the surviving spouse (for income and certain principal distributions) but is not included in the survivor’s estate at the second death. The mechanism uses the first spouse’s $4 million Illinois exemption that would otherwise be wasted. For a couple with $7 million of combined assets, this single move saves approximately $700,000 in Illinois tax at the second death.

2. Lifetime gifting outside the three-year look-back

Gifts made more than three years before death are generally outside the Illinois gross estate. For an Illinois family with assets that will appreciate (closely-held business interests, real-estate equity, investment portfolios), gifting now — using federal annual-exclusion gifts ($18,000 per recipient per year in 2024, indexed) and lifetime exemption gifts — moves both the gift value and all future appreciation outside the Illinois taxable estate. A $500,000 gift to a child that appreciates to $1.2 million over a decade saves approximately $260,000 of Illinois tax at death.

3. Irrevocable life-insurance trust (ILIT) for existing policies

Most adult children are surprised to learn that the death benefit of life insurance counts in the parent’s gross estate if the parent owns the policy. The fix is to move ownership to an ILIT — an irrevocable trust that holds the policy outside the insured’s estate. For a parent with a $500,000 life-insurance policy and a $4M–$5M estate, transferring the policy to an ILIT removes the death benefit from the taxable estate and can save $50,000–$80,000 of Illinois tax. The transfer triggers a three-year look-back — if the insured dies within three years of the transfer, the policy comes back into the estate — which is why this move should be made well before any health crisis.

4. Charitable planning for the planned charitable gift

For Illinois families that already intend to leave charitable gifts, the Illinois charitable-deduction interaction makes those gifts more tax-efficient than equivalent federal-only planning suggests. A $500,000 charitable bequest reduces the Illinois taxable estate dollar-for-dollar; the marginal rate recovered depends on the estate’s position on the rate schedule, but for an estate near or above the $7M–$8M range, the Illinois tax saved on a $500,000 charitable gift can exceed $80,000. For families using charitable remainder trusts (CRTs) or donor-advised funds (DAFs), the lifetime gift to the vehicle removes the asset from the gross estate while providing an income stream or charitable timing flexibility.

The valuation-discount question for closely-held businesses

For Illinois families whose net worth includes a closely-held business interest — a family farm, a small manufacturing company, a real-estate LLC — valuation discounts for minority interest and lack of marketability often reduce the Illinois taxable value substantially below the underlying asset value. Discounts of 25%–40% are not unusual for properly-structured minority interests. The discount mechanism requires a qualified appraisal and is a frequent audit point, but it’s also the single most-effective lever for families whose wealth is concentrated in operating businesses.

The realistic timeline for Illinois planning

For an Illinois family that is currently uncertain whether estate-tax planning is needed:

The bottom line

Illinois’s $4 million estate-tax exclusion is the country’s lowest among states that impose the tax, hasn’t been raised since 2013, and lacks the federal portability mechanism that protects most married couples. For Illinois families with combined net worth approaching or above $4 million per spouse, state-level estate-tax planning isn’t optional and isn’t the same conversation as federal planning. The credit-shelter structure, the ILIT for existing life insurance, and the lifetime gifting outside the three-year window are the moves that capture most of the available savings — and the dollars saved are large enough that procrastination is the single most expensive choice on the table. If your Illinois parent’s estate plan was last updated before the federal exclusion doubled in 2017, it almost certainly doesn’t address the Illinois state cliff. That’s the conversation worth having this quarter.6