Illinois Estate Tax in 2026: What Families and Business Owners Need to Know
Illinois is one of only a handful of states that imposes its own estate tax separate from the federal estate tax. The Illinois exemption — $4 million per individual — is substantially lower than the current federal exemption of $15 million (effective January 1, 2026, under the One Big Beautiful Bill Act), and it is neither indexed for inflation nor portable between spouses. For many Illinois families and business owners who would owe no federal estate tax at all, Illinois estate tax is a real and significant liability that requires specific planning to address.
The Illinois Estate Tax: Basic Framework
The Illinois estate tax is imposed under the Illinois Estate and Generation-Skipping Transfer Tax Act (35 ILCS 405). The tax applies to the taxable estate of any Illinois resident decedent and to the Illinois property of non-resident decedents. The Illinois estate tax return (Form 700) is required for estates with a gross value exceeding $4 million, and the tax is due nine months after the date of death (with a six-month extension available).
Illinois estate tax rates are progressive, ranging from approximately 0.8% on the first amounts above the exemption to 16% on amounts in excess of $10.04 million. For a $6 million Illinois estate, the Illinois estate tax liability before deductions or credits would be approximately $320,000 — a significant amount that proper planning can substantially reduce or eliminate.
The Portability Problem: Why Illinois Is Different
Under federal law, the estate tax exemption is portable — if the first spouse to die does not use their full exemption, the surviving spouse can elect to use the unused portion, effectively doubling the exemption available at the second death. This means a married couple can protect $30 million from federal estate tax without any special planning, by making a portability election on the first spouse’s estate tax return.
Illinois does not have portability. The $4 million Illinois exemption cannot be transferred from one spouse to another. If the first spouse to die leaves everything to the surviving spouse — which avoids Illinois estate tax at the first death via the unlimited marital deduction — the surviving spouse will only have one $4 million exemption when they die. Any amount above $4 million is subject to Illinois estate tax at rates up to 16%.
The standard “I love you” will (everything to spouse, then to children) defers but does not avoid Illinois estate tax, and it wastes the first-to-die spouse’s $4 million exemption entirely.
The Bypass Trust Solution
The traditional solution to the Illinois portability problem is a bypass trust (also called a credit shelter trust). At the first spouse’s death, an amount equal to the Illinois exemption ($4 million) is diverted into an irrevocable bypass trust rather than passing outright to the surviving spouse. The surviving spouse can receive income from the bypass trust and, in many designs, access principal under a defined standard. The assets in the bypass trust are not included in the surviving spouse’s estate for Illinois estate tax purposes.
Result: The $4 million in the bypass trust passes to the next generation free of Illinois estate tax at both deaths. The surviving spouse retains access to income and principal as needed. For a $7 or $8 million combined estate, a properly structured bypass trust arrangement can reduce the Illinois estate tax liability to near zero.
QTIP Trusts and Income Needs
Some married couples are concerned that diverting $4 million into a bypass trust at the first death will not leave the surviving spouse with sufficient assets. A Qualified Terminable Interest Property (QTIP) trust qualifies for the unlimited marital deduction (no Illinois estate tax at the first death), but the assets are included in the surviving spouse’s estate at the second death. The benefit of a QTIP is that the first-to-die spouse retains control over where the trust assets pass at the second death — important in second-marriage situations with children from a prior relationship.
A comprehensive Illinois estate tax plan for a larger married estate often combines a bypass trust (for the $4 million exemption) with a QTIP trust (for assets above the exemption that the surviving spouse needs for income) and appropriate beneficiary designations on retirement accounts.
Business Owners: Special Considerations
For Illinois business owners, the estate tax challenge is compounded by the illiquidity of business interests. An estate with a $5 million privately held business and $500,000 in liquid assets faces a significant cash flow problem — the Illinois estate tax bill may be difficult to pay without liquidating the business. Planning strategies include life insurance held in an Irrevocable Life Insurance Trust (ILIT) to provide liquidity at death, business interest valuation discounts for minority interests, and installment payment arrangements for estate tax attributable to closely held business interests under IRC Section 6166.
Annual Gifting and Other Reduction Strategies
The annual federal gift tax exclusion ($19,000 per donor per recipient in 2026) allows tax-free transfers each year that reduce the estate without triggering gift tax. Illinois does not impose a separate gift tax, which means lifetime gifts reduce the Illinois taxable estate without a corresponding Illinois gift tax liability — an advantage that makes lifetime gifting a particularly effective Illinois estate tax reduction strategy for estates modestly above the $4 million threshold.
The OBBBA and the New Federal Landscape
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently increased the federal estate and gift tax exemption to $15 million per individual ($30 million for a married couple using portability), effective January 1, 2026, with annual inflation adjustments beginning in 2027. This replaced the prior law’s scheduled reduction to roughly $7 million per individual and eliminated the sunset provision that had created years of planning uncertainty.
For the great majority of Illinois families, federal estate tax is no longer a planning concern. But this makes the Illinois estate tax — with its unchanged $4 million exemption, lack of portability, and rates up to 16% — the dominant estate tax issue facing Illinois families. A couple with a combined $8 million estate may owe nothing in federal estate tax, yet face a substantial Illinois estate tax bill at the second death without the bypass trust planning described above.