Illinois vs. Federal Estate Tax: Key Differences Explained

 Posted on November 29, 2025 in Estate Planning

Only about a third of American adults have an estate plan. While most people understand how important an estate plan is, fewer are willing to confront their own mortality and engage in estate planning. Other reasons given for not having an estate plan include being too busy and being too young – although tragedy can strike at any age.

Among those who do have an estate plan, one area of focus is determining how federal and state estate taxes could impact heirs. Many Illinois families are so focused on federal estate tax planning that they completely overlook the separate – and far more demanding – estate tax system in Illinois. The federal exemption is so high ($13.99 million per individual or $27.98 million for married couples) that most families never owe federal estate taxes.

Illinois, however, has a much lower $4 million threshold that can leave thousands of Illinois estates exposed to unexpected taxes. Understanding both federal and state estate tax systems is the key to protecting family wealth. Consulting with a knowledgeable Wheaton, IL estate planning attorney can ensure your questions are answered and that your estate plan implements every available legal strategy for avoiding estate taxes for your heirs.   

What Are the Federal Estate Tax Basics?

The federal estate tax applies only to the portion of the estate that exceeds the federal exemption, which is significantly higher than the Illinois state exemption. The federal system implements portability, which allows surviving spouses to use the unused exemption of a deceased spouse. The federal estate tax also has a top tax rate of 40 percent, and a unified gift-and-estate tax system.

Because of the high exemption, few families will ever owe federal estate tax. The federal system allows gifts to reduce the federal exemption; however, Illinois does not tax lifetime gifts but can "add back" gifts made within three years of the decedent’s death.

Understanding Illinois Estate Tax

Illinois imposes an estate tax on any estate worth more than $4 million. The exemption does not increase with inflation, and estates even slightly over the threshold can face substantial estate taxes. Illinois uses a marginal rate up to 16 percent, and, unlike the federal estate tax, this percentage applies to the entire taxable estate once the threshold is exceeded.

This is known as the "cliff effect" and is one of the most punitive features of Illinois estate tax law. If the taxable estate exceeds $4 million – even by a few hundred dollars – the entire estate becomes subject to tax. This means that an estate valued at $4,050,000 could owe tens of thousands of dollars in estate taxes because the system does not tax only the amount above the threshold.

Unlike the federal system, Illinois does not allow portability, so a surviving spouse cannot use any portion of the deceased spouse’s $4 million exemption. This creates a "use-it-or-lose-it situation that can result in much higher-than-expected taxes for the surviving spouse’s estate. Since the $4 million threshold has been frozen since 2003, while real estate and other asset values have risen considerably, an increasing number of middle to upper-class families and small business owners are now subject to the Illinois estate tax.  

Planning Strategies to Reduce Illinois Estate Tax

Several estate planning strategies can reduce the amount of Illinois estate tax, including:

• Credit shelter or bypass trusts that preserve the first spouse’s exemption, preventing the loss caused by lack of portability.
• Spousal Lifetime Access Trusts (SLATs) and other trust tools that allow couples to lock in future tax protection.
• Annual exclusion gifts, 529 plan funding, and strategic gifting can reduce the size of the estate.
• Family LLCs and FLPs can be helpful for valuation discounts and structured gifting.
• Charitable lead trusts and donor-advised funds reduce taxable estate size.

Contact a Lisle, IL Estate Tax Planning Lawyer

Illinois and federal estate tax laws can be complex, with significant differences between the two. A knowledgeable Wheaton, IL estate planning attorney from The McCormick Law Firm, LLC can ensure your plan minimizes tax exposure and protects your legacy. You will work directly with Attorney McCormick, who offers discounts for military, veterans, and first responders. Call 630-517-8570 to schedule your free consultation.