Living in Illinois might lead you to believe that you won’t be subject to estate tax because it’s below the federal exemption of $13.61 million. But be aware that Illinois is one of the twelve states that has its own estate tax. If your estate exceeds $4 million, you may face unexpected tax liabilities. If you’re aiming to avoid or reduce these taxes, here is what you should know.

What Is the Illinois Estate Tax?
In Illinois if you pass with an estate worth over $4M, you are required to file an estate tax return. Depending on how much you have, your assets may be taxed before being dispersed to your heirs. Illinois has a graduated estate tax system, with a maximum rate of 16%.

What Is Included
The estate tax in Illinois applies to all individuals who are residents of the state. Typically, the following items are included in the calculation of the tax:

  • Bank accounts
  • Investments
  • Retirement accounts
  • Real Estate
  • Personal Property
  • Life insurance policies
  • Interests in family-owned businesses
  • Interests in any other business

Non-Illinois residents who own real property in the state are also subject to the estate tax.

What’s the Tax Rate
As of 2024, the Illinois estate taxes apply to estates valued over the $4 million exemption. The amount of tax liability is based on the amount of value beyond the exception. It’s a graduated scale from 0.8% to 16%. It’s important to factor in these rates when building your estate plan.

See the chart at the bottom for the current estate tax rates.

How To Avoid the Illinois Estate Tax
Multiple strategies are available to reduce or eliminate the amount of estate tax owed.

Gifting Assets
In 2024, individuals can gift up to $18,000 per year without triggering federal gift taxes ($36,000 if married). This means you can gift $18,000 to any number of people. For example, you can gift 10 separate people $18,000 for a total of $180,000.

There’s also a special rule that allows you to gift five times the annual gift exclusion to a 529 account. By using this, you can gift $90,000 ($18,000 x 5) to a 529 account.

Establishing Trust
Properly structured trusts allow married couples in Illinois to take advantage of each other’s estate tax exemptions, effectively raising the threshold for concern from $4 million to $8 million.

Alternatively, creating an Irrevocable Life Insurance Trust (ILIT) provides another avenue for estate planning. This trust can hold a life insurance policy to assist in covering estate taxes. By keeping the policy within the trust, you can prevent the policy’s value from increasing your overall estate.

Do you have a home in another state? Consider designating that state as your permanent residence to potentially minimize or eliminate state-specific estate taxes. Several states, such as Arizona, Florida, and Texas, are known for not having an estate tax.

Donate to Charity
As always, the easiest way to not pay taxes is to donate to charity. Donations are often tax deductible and they reduce your taxable estate.

Bottom Line
If you’re over the Illinois estate tax exemption or the federal estate tax exemption (or both), strategic planning can assist in reducing potential tax liabilities. Reach out to us for guidance in navigating your future financial strategies and estate planning needs. Together, we can ensure a smooth and well-structured plan that focuses on your financial well-being and aligns with your goals.

Illinois Estate Tax Rate

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimers / Sources:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor