June 24, 2021

Illinois is one of 12 states that impose a state estate tax in addition to the federal estate tax. While the federal estate tax only applies to estates valued at $11.7 million or more, the Illinois estate tax applies to estates valued at $4 million or more. Thus, many estates that are not subject to federal estate tax are nevertheless subject to Illinois estate tax. (Note that the $11.7 million federal estate tax exemption is indexed for inflation each year but is currently scheduled to be reduced by 50 percent in 2026 and could be reduced earlier by Congress.)

Unlike the federal estate tax rate, which is a flat 40 percent of the value of the estate in excess of $11.7 million, the exact Illinois estate tax rate is difficult to determine. This is because the Illinois estate tax is based on the state death tax credit, a federal tax law concept that was phased out under federal law in the early 2000s. Illinois responded by amending its estate tax law to reference the state death credit “as in effect on December 31, 2001, without the reduction in the State Death Tax Credit as provided in Section 2011(b)(2) or the termination of the State Death Tax Credit as provided in Section 2011(f) as enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001, but recognizing the exclusion amount of only ... $4,000,000 for persons dying on or after January 1, 2013.”

Confused? You’re not alone. The state death tax credit under the former Section 2011 of the Internal Revenue Code lists rates starting at 0.8 percent (for taxable estates over $40,000) and increasing to 16 percent (for taxable estates over $10,040,000). This could lead one to assume that the actual effective Illinois estate tax rate starts at 0.8 percent for smaller estates and increases to a maximum of 16 percent for larger estates. However, this is not the case. Rather, given the convoluted nature of the Illinois estate tax statute, calculation of the actual amount due requires a complex algebraic calculation.

While it is possible to perform the calculation by hand, a much more practical solution is available. The website of the Illinois Attorney General, the branch of state government responsible for administering the Illinois estate tax, includes an estate tax calculator. The calculator can provide the amount of Illinois estate tax due for different size estates. For example:

By calculating the amount of Illinois estate tax due for ever‑increasing levels of assets, it is possible to compute the marginal estate tax rate. As the value of an estate increases by an incremental amount, the marginal estate tax rate tells us what rate of estate tax will effectively apply to the next incremental amount. It is akin to the marginal income tax rate, which is the amount of tax owed on the next dollar earned of income.

The following chart shows the marginal Illinois estate tax rate, in increments of $250,000, for estates between $4 million and $11.5 million:

For example, the Illinois estate tax due on a $4 million estate is $0, but the Illinois estate tax due on a $5 million estate is $285,714. Thus, the “additional” $1 million is taxed at an effective marginal rate of 28.6 percent (that is, $285,714 divided by $1,000,000). Counterintuitively, the marginal Illinois estate tax rate is higher for estates that are only slightly above the $4 million threshold than for larger estates. Thus, the estate tax due on a $5 million estate is higher than one might expect.

Fortunately, many techniques can reduce the impact of the Illinois estate tax. (More information on one such technique is available here.) However, Illinois residents should be aware of the disproportionate impact of the Illinois estate tax on estates that are only slightly above the $4 million threshold.

To learn more about this or any other estate planning topic, contact a member of Much's Wealth Transfer & Succession Planning group.

Much is grateful for the contributions of 2021 summer associate Daniel Sechuga, who coauthored this article.  

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.