How to Avoid Illinois Estate Tax

Illinois residents with estates valued at more than $4 million need to be aware of the potential tax implications and take proactive steps to minimize their tax liability. If you live in the Prairie State, here’s what you need to know about the estate tax and how to avoid it. A financial advisor can also help you create a personalized estate plan.

What Is the Estate Tax in Illinois?

The estate tax is imposed on the transfer of an individual’s assets after death. An estate generally refers to the net value of a person’s assets, including real estate, investments, bank accounts and personal property, less applicable liabilities, plus certain adjusted taxable gifts. Unlike income taxes, which are based on annual earnings, the estate tax is calculated using the value of the deceased person’s taxable estate. You should note that the estate tax is separate from inheritance taxes, which are levied on beneficiaries who receive assets.

Illinois imposes an estate tax on estates valued at more than $4 million. The Illinois estate tax rates range from 0.8% to 16%, depending on the estate value above the exemption threshold. Compared with other states that levy estate taxes, Illinois has a relatively low estate tax exemption threshold, meaning that more estates are subject to the tax. However, the tax rates are generally lower than the federal estate tax rates.

5 Ways to Avoid the Illinois Estate Tax

A couple researching strategies to avoid estate taxes in Illinois.

While estate tax is required for estates, there are several ways to avoid or mitigate the amount that your estate will pay in taxes when you die, thus lessening the burden on your beneficiaries. Some estate planning tools that could help mitigate the impact of Illinois estate taxes include:

Trusts: By transferring assets into a trust, you may be able to reduce the taxable value of your estate and minimize estate taxes.
Lifetime gifts: Making gifts that qualify for applicable gift tax exclusions during your lifetime can help reduce the size of your Illinois estate and potentially lower estate tax liability. Taxable gifts, however, may be added back when calculating the Illinois estate.
Charitable giving: Donating to qualified charitable organizations can provide estate tax deductions and lower the overall taxable value of your estate.
Pay off tuition or medical expenses: Paying these expenses directly may help lower the amount of cash in your estate and could reduce the time it takes to go through probate.
Buy real estate outside Illinois: Property located outside Illinois may avoid Illinois probate and may qualify for certain valuation rules or tax deductions that could reduce the estate’s taxable value and overall tax liability.

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How Does the Illinois Estate Tax Differ From the Federal Estate Tax?

The federal government imposes an estate tax on estates exceeding a certain value, while some states, including Illinois, have their own estate tax laws that may differ from the federal provisions. Here are some major differences between them:

Exemption Thresholds

Federal estate tax: The federal estate tax exemption threshold in 2024 is at $13.61 million per individual, meaning that estates valued below this amount were exempt from federal estate tax.
Illinois estate tax: Illinois has a much lower exemption threshold when compared with the federal level, at $4 million per individual. This means that estates exceeding this amount are subject to Illinois estate tax.

Tax Rates

Federal estate tax: For estates that exceed the exemption threshold, the federal estate tax rate can be quite high, with estates that exceed the exemption by more than $1 million paying 40%.
Illinois estate tax: Illinois’ estate tax rates varied based on the estate’s value, with rates ranging up to 16% for taxable estates.

Portability

Federal estate tax: A surviving spouse may be able to use any unused portion of their deceased spouse’s estate tax exemption. This can effectively double the exemption amount for married couples.
Illinois estate tax: Illinois does not have portability, so spouses cannot combine their exemption amounts in the same way as they can at the federal level.

Applicable Forms

Federal estate tax: Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) is used to file federal estate tax returns.
Illinois estate tax: Form 700 (Illinois Estate Tax Return) is used for filing estate taxes in Illinois.

Gift Tax

Federal estate tax: Gifts made during a person’s lifetime can affect their federal estate tax exemption. The federal gift tax and estate tax are unified under the same exemption threshold.
Illinois estate tax: Illinois does not have a separate gift tax. However, certain taxable federal gifts are added back when determining the value of an estate for Illinois estate tax purposes.

Estate Tax Lien

Federal estate tax: The federal estate tax creates a lien on the decedent’s assets, which must be resolved before the estate can be distributed to heirs.
Illinois estate tax: Illinois estate tax also creates a lien on the decedent’s assets, which must be addressed before the estate distribution.

Bottom Line

A senior couple reviewing their estate plan in Illinois.

With a lower exemption threshold than the federal estate tax and graduated tax rates, the Illinois estate tax can have a significant impact on the overall tax burden for estates valued above $4 million. Understanding what constitutes an estate, how assets are valued and the differences between state and federal estate tax laws can help you develop an effective estate planning strategy. By working with experienced professionals and using trusts, lifetime gifts and charitable giving, you can minimize your estate tax liability and ensure that assets are protected for your beneficiaries.

Tips for Estate Planning

A financial advisor can help you plan out your estate and guide you in building wealth while you’re still alive. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Before deciding to go it alone when creating your estate plan, consider the potential dangers of DIY estate planning in general.