Illinois Inheritance Tax: The $4 Million Cliff and Form 700

Illinois does not have an inheritance tax. What Illinois does have is a state estate tax, which applies to estates worth more than $4 million and is paid by the estate itself before any assets reach the heirs.¹ Rates are graduated and run from 0.8% to 16% depending on the size of the estate.² Because the $4 million Illinois threshold sits far below the $15 million federal exemption for 2026, many Illinois families owe a state tax even when the IRS wants nothing.³

Why Heirs Don’t Get a Tax Bill

The label matters. An inheritance tax is paid by the person who receives an asset. An estate tax is paid out of the deceased person’s estate before anyone inherits. Illinois has the second, not the first. The personal representative — the executor named in the will or appointed by the court — calculates the tax, files the return, and pays it from estate funds.¹ Beneficiaries receive whatever is left after the estate has settled the bill. The controlling statute is the Illinois Estate and Generation-Skipping Transfer Tax Act, 35 ILCS 405.⁴

The $4 Million Threshold and the Cliff Effect

An Illinois estate worth $4 million or less owes no state estate tax and generally does not need to file a return.¹ Cross the line by a single dollar and a return is required.

The critical detail is how the exemption works. The $4 million figure is a threshold, not a credit against the tax.¹ Once you’re over, the tax is calculated on the entire estate, not just the portion above $4 million. That produces a cliff: an estate of $3,999,999 owes zero, while an estate of $4,100,000 is taxed on the full $4.1 million.

How the Tax Is Calculated

Illinois computes the tax using a graduated rate table originally tied to the old federal state death tax credit under Section 2011 of the Internal Revenue Code.⁴ Marginal rates start at 0.8% on the smallest taxable slices and top out at 16% on amounts over roughly $10 million. The brackets apply to the “adjusted taxable estate,” which is the taxable estate minus $60,000.⁵

The marginal rate brackets are:

$0 – $40,000: 0%
$40,000 – $90,000: 0.8%
$90,000 – $140,000: 1.6%
$140,000 – $240,000: 2.4%
$240,000 – $440,000: 3.2%
$440,000 – $640,000: 4.0%
$640,000 – $840,000: 4.8%
$840,000 – $1,040,000: 5.6%
$1,040,000 – $1,540,000: 6.4%
$1,540,000 – $2,040,000: 7.2%
$2,040,000 – $2,540,000: 8.0%
$2,540,000 – $3,040,000: 8.8%
$3,040,000 – $3,540,000: 9.6%
$3,540,000 – $4,040,000: 10.4%
$4,040,000 – $5,040,000: 11.2%
$5,040,000 – $6,040,000: 12.0%
$6,040,000 – $7,040,000: 12.8%
$7,040,000 – $8,040,000: 13.6%
$8,040,000 – $9,040,000: 14.4%
$9,040,000 – $10,040,000: 15.2%
Over $10,040,000: 16.0%

The final number is not a straight lookup. Illinois uses an interrelated computation because the state tax affects the federal taxable estate, which then adjusts the state figure downward.¹ The Illinois Attorney General publishes examples for estates made up entirely of Illinois property:

$4 million estate: $0 in Illinois estate tax
$5 million estate: $285,714 in Illinois estate tax, roughly a 5.7% effective rate

That jump from nothing to $285,714 is the cliff in numbers.¹

How Illinois and the Federal Estate Tax Fit Together

The federal estate tax exemption for 2026 is $15 million per person after the One, Big, Beautiful Bill Act made the higher exemption permanent and indexed it to inflation.³ The state exemption is $4 million. An $8 million Illinois estate owes a real state tax bill and no federal tax at all.

When the estate does exceed the federal figure, a federal Form 706 must be filed. Illinois Form 700 requires a copy of Form 706 whenever the estate’s tentative taxable value plus adjusted taxable gifts exceeds the federal exemption.⁶

Married Couples: No Illinois Portability

Federal law lets a surviving spouse inherit the deceased spouse’s unused federal exemption through portability. To claim it, the executor files a federal Form 706 within nine months of death, or under a late-filing relief procedure within five years, even if no federal tax is owed.⁷ Together, that can shelter as much as $30 million federally for a married couple in 2026.

Illinois does not recognize portability. The unused portion of one spouse’s $4 million state exemption cannot be transferred to the surviving spouse.¹ Without planning, a couple with $8 million who leave everything to each other can waste the first spouse’s Illinois exemption entirely, exposing the full $8 million to state tax at the second death.

Marital Deduction and Bypass Trusts

Assets left outright to a surviving spouse qualify for the unlimited marital deduction, which defers estate tax until the second death.⁸ That eliminates tax at the first death but concentrates everything in the survivor’s estate.

A bypass trust, sometimes called a credit shelter trust, is the common workaround. When the first spouse dies, up to $4 million funds a trust that benefits the surviving spouse during life but stays out of the surviving spouse’s taxable estate. The remainder passes to the survivor outright. Done properly, the structure shelters up to $8 million across both deaths.

The Illinois QTIP Election

Illinois lets executors make a qualified terminable interest property (QTIP) election that is separate from and independent of the federal QTIP election.⁴ A QTIP election claims a marital deduction for property left in trust for the surviving spouse even though the survivor doesn’t control where the trust assets eventually go. Being able to make the two elections separately gives planners room to minimize combined state and federal tax.

Gifting to Bring an Estate Down

Lifetime gifts are one of the most direct ways to reduce an estate. The federal annual gift tax exclusion for 2026 is $19,000 per recipient with no gift tax reporting.³ A married couple can give $38,000 per recipient every year.

For larger transfers, the federal lifetime gift tax exemption is also $15 million for 2026. Illinois adds a wrinkle: adjusted taxable gifts get added back to the gross estate when determining whether the $4 million threshold has been crossed.¹ Gifts above the annual exclusion made years ago can still count. Annual-exclusion gifts are not added back, which is what makes consistent annual gifting effective.

What Actually Counts as Part of the Estate

The gross estate reaches well beyond assets that pass through probate. It generally includes:

Real estate owned by an Illinois resident, including property in other states
Bank accounts, brokerage accounts, and certificates of deposit
IRAs, 401(k)s, and pensions, regardless of named beneficiaries
Ownership stakes in LLCs, partnerships, and closely held businesses
Assets held in a revocable living trust
Life insurance death benefits from policies the deceased owned

Life insurance catches people off guard. If the deceased had any ownership rights over the policy — the ability to change beneficiaries, borrow against cash value, or cancel coverage — the full death benefit is in the gross estate, even when it pays directly to a named beneficiary. Keeping insurance out of the estate requires someone else, often an irrevocable trust, to own the policy, and the deceased must have given up all ownership rights at least three years before death.

Non-Residents Who Own Illinois Property

If you live outside Illinois but own real estate or tangible personal property here, your estate may still owe Illinois tax. The tax is figured as if the whole estate were in Illinois, then multiplied by the ratio of Illinois property to total property.¹ A $10 million estate with $1 million of Illinois property pays roughly a tenth of what a fully-in-Illinois $10 million estate would pay.

Filing Form 700 and the Nine-Month Deadline

The state return is Form 700, the Illinois Estate and Generation-Skipping Transfer Tax Return, available from the Illinois Attorney General.⁶ It calls for an inventory of assets at fair market value on the date of death, along with allowable deductions such as debts, funeral costs, and administrative expenses. If a federal Form 706 is required, a copy is attached.

Where you file depends on the county. Estates in Cook, DuPage, Lake, and McHenry Counties send the original Form 700 to the Attorney General’s Chicago office. All other counties file with the Springfield office.¹ Payment goes separately to the Illinois State Treasurer using the Treasurer’s payment form.⁶

Both the return and the payment are due within nine months of the date of death, matching the federal Form 706 deadline.⁶ An executor who can’t meet the deadline can request an extension using Form 700-EXT, filed within the original nine-month window; a payment extension has to include a written explanation of why paying on time is impossible or impractical.⁹

Penalties and Interest

Missing the deadline without an approved extension triggers charges on both filing and payment:

Late filing: 5% of the tax owed per month or partial month, capped at 25%
Late payment: 0.5% of the tax owed per month or partial month, capped at 25%
Interest: 10% per year from nine months after the date of death until paid

These are calculated on Form 700 and paid to the State Treasurer along with the tax. On a large estate, a few months of delay can add tens of thousands of dollars. Once the Attorney General reviews the return and the Treasurer confirms full payment, the state issues a Certificate of Discharge, which executors generally need before making final distributions to beneficiaries.⁶

1
Illinois Attorney General. Estate Tax Instruction Fact Sheet
2
Illinois Attorney General. State Death Tax Credit Table
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Illinois General Assembly. Illinois Code 35 ILCS 405-2 – Definitions
5
eCFR. 26 CFR 20.2011-1 – Credit for State Death Taxes
6
Illinois Attorney General. Form 700 – Illinois Estate and Generation-Skipping Transfer Tax Return
7
Internal Revenue Service. Instructions for Form 706
8
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
9
Illinois Attorney General. Form 700-EXT – Request for Extension of Time to File and Pay Illinois Estate Tax