Illinois Estate Tax Planning for Retirees in 2026: The $4M Exemption, the $11M OBBBA Orphan Zone, Bypass Trusts, and the Illinois QTIP

On July 4, 2025 the federal government made the $15 million estate and gift tax exemption permanent under the One Big Beautiful Bill Act (OBBBA), Pub. L. 119-21.^[1] The scheduled sunset that would have dropped the federal exemption to roughly $7.1 million in 2026 was cancelled. Married couples now have $30 million of combined federal exemption without any planning at all, indexed for inflation each year going forward. The tax and estate planning press treated this as the end of federal estate tax anxiety for anyone below the ultra-high-net-worth line.

Illinois did not conform. The Illinois estate tax exemption remains $4 million per decedent under the Illinois Estate and Generation-Skipping Transfer Tax Act, 35 ILCS 405.^[2] That figure has been unchanged since January 1, 2013 when Public Act 96-1496 replaced the prior $2 million exemption, and there is no inflation indexing built into the statute. Illinois has no portability of a deceased spouse's unused exemption. Illinois has no reciprocal deduction for federal estate tax paid. Illinois estate tax rates are progressive under the pre-2001 IRC §2011 state death tax credit schedule, starting near 0.8 percent above the exemption and topping out at 16 percent above roughly $10.04 million.^[3]

The mismatch produces what we call the OBBBA orphan zone — the range of estate values between $4 million (Illinois exemption) and $15 million (federal exemption) where every Illinois estate owes state tax while owing zero federal tax. There are hundreds of thousands of Illinois estates in that range given the state's real estate values, retirement account balances (which count in full at date of death), business ownership, and life insurance holdings. For every household in the orphan zone, the traditional federal-first planning frame — "assume federal drives the strategy, state falls out" — is exactly backward. Illinois now drives the strategy for every Illinois estate below $15 million, and both regimes drive strategy for estates above.

This is the 2026 field guide for Illinois estate tax planning for retirees. It covers the 35 ILCS 405 mechanic including the pre-2001 §2011 rate table, the OBBBA orphan zone math, the no-portability trap and the bypass-trust workaround, the unique Illinois QTIP separate-election mechanic, the retirement-account inclusion problem, the adjusted-taxable-gift computation, three worked case studies at $6 million / $12 million / $30 million estate values, six mistakes to avoid, and an 8-item pre-retirement action checklist. When you want to run the numbers yourself, the estate tax calculator implements the pre-2001 §2011 schedule with statutorily exact math for Illinois and three other §2011 states.

The 35 ILCS 405 mechanic: exemption, rate table, and how the computation actually runs

The Illinois Estate and Generation-Skipping Transfer Tax Act is codified at 35 ILCS 405/1 through 405/18. The tax is imposed on the transfer of the taxable estate of every Illinois-resident decedent and on the Illinois-situs real property and tangible personal property of every nonresident decedent under 35 ILCS 405/3.^[2] The mechanic hinges on a specific piece of pre-2001 federal law: Illinois estate tax equals the maximum credit for state death taxes that was allowed under the federal estate tax system in IRC §2011 as it existed on December 31, 2001, before Congress phased out that credit under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).^[4] Congress removed the §2011 credit from federal law, but Illinois froze the credit table into state law as its own tax schedule — and that pre-2001 schedule is what still governs Illinois estate tax in 2026.

The Illinois exemption is $4 million per decedent under 35 ILCS 405/2. The exemption applies to the sum of the Illinois taxable estate (federal Form 706 Line 3) plus adjusted taxable gifts (federal Form 706 Line 4) made after 1976. If the sum exceeds $4 million, an Illinois Form 700 must be filed with the Illinois Attorney General's Estate Tax Division within nine months of death, extendable by six months on request.^[5] The exemption is not indexed for inflation. It has been $4 million since January 1, 2013 and shows no sign of being raised — HB2368, introduced in the 104th General Assembly by Rep. Margaret Croke, would restructure the rate schedule but keep the exemption at $4 million.^[6]

The rate computation uses the pre-2001 §2011 schedule with a $60,000 adjustment applied first. In pseudocode:

where §2011_credit(x) = graduated_bracket_lookup(max(0, x − $60,000)). The graduated brackets run from 0.8 percent on the first $50,000 above the $60,000 adjustment, up through 16 percent on amounts above $10.04 million above the adjustment. The full 21-bracket schedule is:

Source: pre-2001 IRC §2011(b) as in effect December 31, 2000, incorporated into Illinois law by 35 ILCS 405/2. The $60,000 adjustment applies at the bottom before the bracket lookup.

For a $4 million Illinois exemption the §2011 credit is: adjusted base = $3,940,000, which falls in the $3.54M–$4.04M bracket at 10.4 percent marginal on $400,000 excess above $3.54M base. Cumulative: $238,800 base + 0.104 × ($3,940,000 − $3,540,000) = $238,800 + $41,600 = $280,400. That $280,400 figure is the Illinois credit shelter — the estate tax that the $4 million exemption fully offsets. Any Illinois tax computed on the actual taxable base above $4 million is reduced by $280,400 to arrive at Illinois estate tax due.

For an $8 million Illinois taxable base: §2011($8,000,000) has adjusted base $7,940,000, falls in the $7.04M–$8.04M bracket at 13.6 percent marginal on $900,000 excess above $7.04M base. Cumulative: $650,800 base + 0.136 × ($7,940,000 − $7,040,000) = $650,800 + $122,400 = $773,200. Illinois tax = $773,200 − $280,400 = $492,800. Effective rate: 6.16 percent. The published Illinois Attorney General's Form 700 calculator produces the same number to the dollar, and CalcLeap's estate tax calculator implements the schedule with statutorily exact math.^[5]

The OBBBA orphan zone: $4M state / $15M federal / $11M in between

The One Big Beautiful Bill Act signed by President Trump on July 4, 2025 permanently set the federal estate and gift tax basic exclusion amount at $15 million per decedent under IRC §2010(c)(3), indexed for inflation annually.^[1] This replaced the prior TCJA-era $13.99 million exemption for 2025 and, more importantly, cancelled the January 1, 2026 sunset that would have dropped the federal exemption to roughly $7.1 million.^[7] For married couples, portability under IRC §2010(c)(4) doubles the combined exemption to $30 million with no trust planning required at the federal level. The permanent status means there is no scheduled political cliff — the exemption stays at $15 million (indexed) unless future legislation changes it.

Illinois did not conform. The Illinois exemption remains $4 million per decedent under 35 ILCS 405/2, unchanged since 2013. Combined with the Illinois no-portability rule, a married Illinois couple has $8 million of combined Illinois exemption if they use both exemptions optimally through bypass planning, but only $4 million of usable exemption if they leave everything outright to the surviving spouse. The mismatch between the federal $15 million per decedent / $30 million per couple and the Illinois $4 million per decedent / $4-$8 million per couple defines the OBBBA orphan zone.

All figures 2026 Illinois estate tax under 35 ILCS 405 using pre-2001 §2011 schedule + federal estate tax under IRC §2001(c) with $15M OBBBA exemption. MFJ = married filing jointly. Combined figures assume optimal bypass and Illinois QTIP planning where indicated. See our state estate tax field guide for the multistate comparison.

Three points jump off the table. First, the orphan zone is real and material for middle-market Illinois estates: a $12 million estate pays over $1 million to Illinois while paying zero to the federal government. Second, married couples that fail to plan lose the first-spouse exemption entirely — the $8 million MFJ estate goes from zero Illinois tax with bypass planning to $301,600 without it. Third, above the federal exemption threshold both regimes apply and combined effective rates jump sharply: a $20 million single estate faces roughly $4.3 million of combined federal plus Illinois tax, a 21.57 percent combined effective rate on a fully-taxable-in-both-systems estate.

The no-portability trap and the bypass-trust workaround

The federal estate tax portability regime under IRC §2010(c)(4) allows a surviving spouse to inherit the deceased spouse's unused federal exemption (Deceased Spousal Unused Exclusion, or DSUE) by filing a timely federal Form 706 electing portability, generally within nine months of death or 15 months with an automatic extension. The DSUE is then added to the survivor's own $15 million exemption at the second death. A couple with $30 million of assets can pass everything to the surviving spouse under the marital deduction at the first death (zero federal tax), file the portability election, and have $30 million of combined federal exemption available at the second death — again zero federal tax. No trust planning required for federal purposes.^[8]

Illinois has never enacted portability. There is no Illinois analog to §2010(c)(4). Under 35 ILCS 405 each Illinois decedent has their own $4 million exemption, and any unused portion at the first death is permanently lost if not affirmatively captured through a bypass trust. The mechanic is straightforward. A married couple that leaves everything outright to the surviving spouse pays zero Illinois tax at the first death (marital deduction under 35 ILCS 405/2 conforming to federal IRC §2056) but forfeits the deceased spouse's $4 million exemption forever. At the second death, only the surviving spouse's own $4 million exemption is available to shelter what is now the combined estate.

The bypass trust — also called a credit shelter trust, family trust, or B trust — is the traditional workaround. At the first spouse's death, an amount up to the deceased spouse's Illinois exemption ($4 million in 2026) is diverted into an irrevocable trust rather than passing outright to the surviving spouse. The trust benefits the surviving spouse during their lifetime (typically income for life plus discretionary principal for health, education, maintenance, and support standards) but the surviving spouse holds no general power of appointment over the corpus. Because the surviving spouse cannot direct where the corpus passes at their death, the trust assets are NOT included in the surviving spouse's estate for Illinois estate tax purposes at the second death.

The math for a $10 million married couple:

The middle row is the base-case save: bypass trust reduces Illinois tax at the second death from $702,800 to $182,000, a $520,800 savings. The third row shows the additional value of a bypass trust when both estates grow between deaths — the appreciation on the $4 million in the bypass trust is also excluded from the second death estate, and if the bypass trust grows to $6 million by the second death, that $2 million of growth escapes Illinois tax entirely.

Bypass trust planning requires attention at three points. First, the trust must be established during life (in a revocable trust structure that becomes irrevocable at the first death) or by will with clear funding formulas. Second, the funding formula must be drafted correctly to fill the Illinois exemption without wasting basis step-up on assets that would otherwise get one under IRC §1014 at the second death. Third, the surviving spouse's beneficial interest must be structured to preserve the trust's exclusion from their estate — meaning no general power of appointment, no unrestricted right to withdraw principal, and typically an independent co-trustee for discretionary distributions.

The Illinois QTIP: the separate election unique to Illinois

The QTIP trust — Qualified Terminable Interest Property trust under IRC §2056(b)(7) — allows a decedent to leave assets in trust for the surviving spouse's lifetime benefit while retaining control over where the principal passes at the second death. In exchange for these benefits, the property qualifies for the marital deduction at the first death (deferring estate tax) but is then included in the surviving spouse's estate at the second death. The federal QTIP election on Form 706 is all-or-nothing per trust and, once made, locks the trust into the surviving spouse's federal estate.

Illinois allows a SEPARATE Illinois QTIP election under 35 ILCS 405/2(b-1). The executor can elect QTIP treatment for Illinois estate tax purposes independent of the federal QTIP election on the same trust. This is unusual — most states either fully conform to the federal QTIP election or do not allow QTIP treatment at all. Illinois's separate election was added by Public Act 96-1496 in 2011 specifically to give married couples flexibility to optimize the federal-state exemption mismatch, and its planning value doubled after OBBBA widened that mismatch from roughly $10 million to $11 million per decedent.^[9]

The classic Illinois QTIP fact pattern: a married couple with $8 million of combined assets. First spouse dies with $5 million titled to the trust in their name. Without a QTIP election, the deceased spouse's $4 million Illinois exemption shelters $4 million and Illinois tax applies to the $1 million excess — roughly $70,800. With an Illinois-only QTIP election on a $1 million marital trust portion (skipping the federal QTIP because the deceased spouse's federal exemption already covers everything below $15 million), the entire $5 million passes without Illinois tax at the first death (deceased spouse's $4 million exemption plus $1 million Illinois-QTIP marital deduction). The $1 million Illinois-QTIP trust is then included in the surviving spouse's Illinois estate at the second death, but the surviving spouse's $4 million Illinois exemption plus any bypass planning at the second death may fully shelter it.

The retirement-account inclusion problem: 401(k), IRA, and Roth in the taxable estate

During life Illinois excludes qualified retirement income from state income tax at 0 percent under 35 ILCS 5/203(a)(2)(F) — the subject of our Illinois §401(k) and retirement income taxation guide. At death the full account balance of every qualified retirement account is includible in the Illinois gross estate at fair market value under 35 ILCS 405/3, which cross-references the federal gross estate under IRC §§2031-2044.^[2] This applies to 401(k), 403(b), 457(b), traditional IRA, Roth IRA, SEP-IRA, and SIMPLE IRA balances alike. The income-tax exclusion and the estate-tax inclusion are entirely separate systems.

The scale of the problem is often underestimated. A late-career professional household that has accumulated $2 million in a 401(k), $500,000 in a Roth IRA, $3 million in a taxable brokerage, $1.5 million in a home, $500,000 in cash and CDs, and $500,000 of term life insurance owned by the decedent has an $8 million Illinois gross estate — well above the $4 million exemption and squarely in the OBBBA orphan zone. Retirement accounts alone account for $2.5 million of that $8 million estate.

Beneficiary designations on retirement accounts do NOT remove the balance from the Illinois taxable estate — they only determine who receives the account after death and how it is treated for federal income tax purposes to the beneficiary under IRC §§401(a)(9) and 408(d) (including the SECURE Act 10-year rule for non-eligible-designated beneficiaries). The account balance is still in the decedent's gross estate at date-of-death value, subject to estate tax regardless of who the named beneficiary is.

The primary levers to reduce Illinois estate tax on retirement accounts are:

1. Lifetime Roth conversions at 0 percent Illinois rate — Illinois taxes Roth conversion income at 0 percent under §203(a)(2)(F). Converting traditional pretax balances to Roth at 0 percent Illinois cost during life shifts the federal income tax cost forward to now (paid from other assets outside the estate) and reduces the Illinois estate tax base because the federal tax paid leaves the estate. A $500,000 Roth conversion at a 32 percent federal effective rate reduces the estate by $160,000 of tax paid, saving roughly $22,880 of Illinois estate tax at the top marginal 16 percent rate — plus removing the future growth of that $160,000 from the estate entirely. See our backdoor Roth IRA guide and Roth conversion ladder guide for the mechanics.
2. Qualified charitable distributions (QCDs) — after age 70½, up to $108,000 per year (2026 indexed under SECURE 2.0 §307) can be distributed directly from an IRA to a qualified charity under IRC §408(d)(8), satisfying required minimum distributions without adding to gross income and permanently removing the amount from the estate.
3. Charitable beneficiary designation — naming a §501(c)(3) charity as beneficiary of a traditional IRA passes the account outside probate and outside estate tax under the unlimited charitable deduction of IRC §2055.
4. Life insurance in an irrevocable life insurance trust (ILIT) — a properly-structured ILIT holding a permanent life insurance policy funds the estate tax liability at the second death without inflating the taxable estate, because the death benefit is neither owned by nor payable to the decedent's estate under IRC §2042.
5. Bypass trust that includes retirement account "see-through" trust language — retirement accounts can be paid to a bypass trust structured as a see-through trust under IRC §401(a)(9)(H) and Treas. Reg. §1.401(a)(9)-4, using the deceased spouse's Illinois exemption on the account balance while preserving stretch potential for the surviving spouse under the SECURE Act 10-year rule.

Adjusted taxable gifts and the three-year lookback

Illinois follows the federal gift add-back rules by incorporating them by reference through the federal Form 706 gross estate computation. Under IRC §2001(b) the tentative federal estate tax is computed on the taxable estate PLUS adjusted taxable gifts (Form 706 Line 4) made after 1976. The Illinois exemption test under 35 ILCS 405/2 applies to the same sum: taxable estate plus adjusted taxable gifts.^[3]

Adjusted taxable gifts are the total of taxable gifts (gifts above the annual exclusion of $19,000 per donee for 2026 under IRC §2503(b), and gifts to non-spouse donees not qualifying for the marital deduction) made after 1976. They do NOT include gifts that were fully sheltered by the annual exclusion, direct payments for medical or educational expenses under IRC §2503(e), or gifts to a spouse or charity qualifying for those respective deductions.

A decedent who gave $500,000 in cumulative taxable gifts over their lifetime and dies with $3.8 million of gross Illinois estate has an Illinois taxable base of $4.3 million, not $3.8 million. Illinois tax applies to the $300,000 above the $4 million exemption — roughly $23,200 at the 7.2-8.0 percent marginal bracket. The lifetime taxable gifts do not directly reduce the estate value at death (they were gifted away years ago and grew in the donee's hands) but they DO count against the Illinois exemption. This is a common surprise for families that thought aggressive lifetime gifting had eliminated all state estate tax exposure.

Additionally, IRC §2035 requires certain transfers made within three years of death to be pulled back into the gross estate: specifically, life insurance policies transferred within three years under §2035(a) (the classic ILIT-timing trap) and gift taxes paid on gifts made within three years under §2035(b) (the gross-up rule to prevent gifting one's way out of estate tax on the tax itself). Illinois follows both.

There is no separate Illinois gift tax — Illinois is one of 49 states without a gift tax; only Connecticut has one. But the federal gift tax framework flows through to Illinois estate tax via the Form 706 mechanics. Systematic annual-exclusion gifting under IRC §2503(b) ($19,000 per donee for 2026, or $38,000 per donee for a married couple electing gift-splitting under §2513) does not affect the Illinois taxable base and is the primary vehicle for shrinking the estate below the Illinois exemption over multiple years.

Three case studies: $6M / $12M / $30M Illinois estates

Case 1: Margaret and John, ages 68 and 71, $6 million combined estate, retiring in Naperville

Margaret is a retired public school teacher receiving a $65,000 TRS pension. John is a retired mechanical engineer with $1.4 million in a rollover IRA, $500,000 in a Roth IRA, $85,000 of Social Security combined. They own their Naperville home outright at $850,000 current value, hold $2.8 million in a taxable brokerage account, and carry $500,000 of remaining term life insurance on John. Combined estate: $6.05 million. Both are Illinois residents planning to stay.

The federal analysis: $6.05 million is well below the $15 million federal exemption. Zero federal estate tax at either death.

The Illinois analysis with no planning: everything to the surviving spouse via marital deduction at first death (zero Illinois tax). At the second death, the surviving spouse has a $6.05 million estate against a $4 million Illinois exemption. Illinois tax: §2011($6,050,000) − §2011($4,000,000) = $528,800 − $280,400 = $248,400.

With bypass trust funded to $4 million at the first death: $4 million diverted into a bypass trust that benefits the surviving spouse but is not in the surviving spouse's estate. $2.05 million passes to the surviving spouse under the marital deduction. At the second death, the surviving spouse's Illinois estate is $2.05 million plus any growth minus any spending. If we assume rough neutrality — $2.05 million at the second death — the surviving spouse's $4 million exemption fully shelters the estate and Illinois tax is $0. Savings from bypass planning: $248,400.

Additional plays: John completes a $200,000 Roth conversion at age 71 while still an Illinois resident, converting traditional pretax to Roth at 0 percent Illinois tax cost (federal cost roughly $44,000 at 22 percent marginal, paid from taxable brokerage). This shrinks the taxable estate by $44,000 (federal tax paid leaves the estate) plus removes future growth from the estate. Modest but positive. Total Illinois estate tax after planning: $0. Total planning cost: legal fees for the trust (~$3,000-$6,000) plus tax on the Roth conversion ($44,000 federal, $0 Illinois).

Case 2: David and Rachel, ages 62 and 60, $12 million combined estate, Chicago dentist household

David is a private-practice dentist in Chicago earning $520,000, Rachel is a hospital administrator earning $185,000. They have $3.2 million in David's 401(k), $850,000 in Rachel's 401(k), $1.5 million in traditional IRAs, $400,000 in Roth IRAs, $3.5 million in a taxable brokerage, $1.8 million in their Lincoln Park home, $250,000 in a Michigan lake cottage, $500,000 term life insurance on David inside a properly-structured ILIT (excluded from estate). Combined estate: $12 million. Squarely in the OBBBA orphan zone.

Federal analysis: $12 million well below $15 million federal exemption. Zero federal tax at either death.

Illinois analysis with no planning: everything to surviving spouse under marital deduction (zero at first death). At second death, $12 million minus surviving spouse's $4 million exemption. §2011($12,000,000) − §2011($4,000,000) = $1,313,200 − $280,400 = $1,032,800. Over $1 million of state tax on an estate that owes zero federal.

Illinois analysis with bypass trust funded to $4 million at first death plus Illinois QTIP election on remaining $4 million marital trust: $4 million to bypass (using first spouse's Illinois exemption), $4 million to Illinois QTIP marital trust (Illinois marital deduction with separate election to defer tax to second death), $4 million to surviving spouse outright. At second death, surviving spouse's Illinois estate includes the Illinois QTIP portion ($4 million grown to say $5 million by second death) plus the outright inheritance ($4 million grown to say $4 million net of spending) = $9 million. §2011($9,000,000) − §2011($4,000,000) = $986,800 − $280,400 = $706,400. Savings from combined bypass + Illinois QTIP: $326,400.

The Michigan cottage introduces a complication: it is Michigan-situs real property owned by an Illinois-resident decedent, subject to Michigan estate tax jurisdiction. Michigan repealed its estate tax effective 2005, so no Michigan tax applies. But if the Michigan cottage is retitled during life to a Michigan LLC owned by David and Rachel's Illinois revocable trust, the situs converts from real property (Michigan-situs, potentially subject to future Michigan tax if reinstated) to intangible LLC interest (Illinois-situs, no additional Michigan exposure). Standard planning insurance.

Additional plays: David executes $200,000 per year of Roth conversions from age 62 through age 71 while an Illinois resident, converting $2 million of traditional pretax to Roth at 0 percent Illinois cost (federal cost roughly $580,000 across ten years, paid from taxable brokerage). This shrinks the taxable estate by $580,000 of federal tax paid plus reduces future required minimum distributions and their forced-drawdown estate impact. Combined with bypass + Illinois QTIP, total Illinois estate tax after planning drops from $1,032,800 to roughly $610,000, a 40 percent reduction.

Case 3: Marcus and Diana, ages 71 and 68, $30 million combined estate, Winnetka business owners

Marcus founded a Chicago manufacturing business valued at $18 million, Diana is a retired federal executive with a $95,000 CSRS pension. They hold $4.2 million in retirement accounts across 401(k)/IRA balances, $5 million in a taxable investment portfolio, $2.4 million in their Winnetka home, $400,000 in the Michigan cottage. Combined estate: $30 million. Above both the federal $15 million/$30 million combined exemption and Illinois $4 million exemption.

Federal analysis with portability: $30 million exactly at the combined federal exemption ($15 million each). If they use portability at the first death (file federal Form 706 electing portability of DSUE), combined $30 million exemption available at second death. Zero federal tax if the estate is exactly $30 million; but the manufacturing business is expected to appreciate 8 percent per year for the next 15 years, projecting to over $57 million by the second death 20 years out. Federal exemption grows with inflation at maybe 3 percent per year, projected to roughly $54 million by the second death 20 years out. Federal tax exposure exists but is manageable through further planning.

Illinois analysis is more painful. Illinois has no portability. Without bypass planning, everything passes to the surviving spouse under Illinois marital deduction (zero Illinois tax at first death) but then the entire $30 million-plus is in the surviving spouse's Illinois estate at the second death. Illinois tax: §2011($30M+) − §2011($4M) = approximately $4.7 million minus $280,400 = $4.4 million.

With bypass trust funded to $4 million at first death PLUS Illinois QTIP election on marital trust of $11 million (the Illinois portion of the federal exemption gap) PLUS federal-and-Illinois QTIP election on the remaining $15 million passing to a QTIP marital trust: at the first death $4 million is sheltered by first spouse's Illinois exemption in the bypass trust, $11 million is in an Illinois-QTIP-only marital trust (Illinois deferred, federal already sheltered by first spouse's $15 million federal exemption), $15 million is in a full-federal-and-Illinois-QTIP marital trust. At the second death the Illinois-QTIP-only trust and the full QTIP trust are both in the surviving spouse's Illinois estate ($26 million after possible growth or spending), reduced by the surviving spouse's own $4 million Illinois exemption. Illinois tax at the second death: §2011($26,000,000) − §2011($4,000,000) = approximately $3,802,800 − $280,400 = $3.52 million. Savings vs no planning: about $880,000.

Additional plays: family limited partnership discounts on the manufacturing business (typical 25-35 percent minority interest and lack-of-marketability discounts, converting $18 million of business into perhaps $12 million of discounted value for transfer tax purposes), grantor retained annuity trusts (GRATs) to freeze the estate value on future business appreciation, life insurance in an ILIT sized to pay the projected estate tax liability, charitable remainder trust for the Michigan cottage. Total Illinois estate tax after full planning could be reduced by another $1-$2 million, bringing effective Illinois rate below 8 percent on the $30 million-plus estate.

Six mistakes to avoid

1. Assuming the federal $15 million exemption eliminates state estate tax exposure

The OBBBA orphan zone is real. Every Illinois couple with $4 million to $30 million of combined assets owes zero federal tax and material Illinois tax. The mainstream tax and estate planning press treats OBBBA as ending federal estate tax anxiety for anyone below the ultra-high-net-worth line, and that framing is correct for federal but wrong for the 12 states plus DC that still impose their own estate tax. Illinois is the second-largest state estate tax jurisdiction by aggregate revenue after New York, and its $4 million exemption sits at less than one-third of the federal figure. Planning that assumed federal drives the strategy needs to be reworked from the Illinois axis.

2. Leaving everything outright to the surviving spouse under the marital deduction

Zero Illinois tax at the first death is not zero Illinois tax over the marriage. Each spouse has their own $4 million exemption. Without bypass planning, the first spouse's exemption is permanently forfeited and the surviving spouse's single $4 million exemption is all that shelters the combined estate at the second death. For an $8 million couple this costs roughly $301,600 of Illinois tax that a bypass trust at the first death would eliminate. For a $10 million couple, roughly $520,800. Establish a bypass trust with clear funding formulas during life — either through a revocable trust that becomes irrevocable at the first death or through will provisions that fund at probate.

3. Skipping the Illinois QTIP separate election

The Illinois QTIP separate election under 35 ILCS 405/2(b-1) is the most under-utilized planning tool in Illinois estate tax. Combined with a bypass trust it allows married couples with estates above $8 million to defer Illinois tax on additional amounts up to the federal exemption gap without triggering federal QTIP inclusion. For estates in the $8 million to $18 million range, executing an Illinois-only QTIP election on a marital trust can defer $100,000 to $500,000 of Illinois tax to the second death, with the additional benefit of the surviving spouse's investment growth accumulating outside the tax base. Ask the estate attorney explicitly whether an Illinois-only QTIP election was considered on Form 700 Schedule M.

4. Ignoring the retirement-account inclusion problem

Illinois excludes retirement income from state tax during life. Illinois includes retirement account balances in the taxable estate at death. The two rules are entirely separate. Retirees who accumulated substantial 401(k) and IRA balances during their working years often find that retirement accounts alone push their estate above the $4 million Illinois exemption. Every $1 million of retirement account balance carries up to $160,000 of Illinois estate tax exposure at the 16 percent top rate. Levers: lifetime Roth conversions at 0 percent Illinois cost, qualified charitable distributions after age 70½, charitable beneficiary designations, ILIT-owned life insurance to fund the tax liability without inflating the estate.

5. Making large gifts within three years of death without understanding the pullback

IRC §2035 pulls life insurance transferred within three years back into the gross estate under §2035(a) and gift taxes paid on gifts within three years back under §2035(b). Illinois follows both rules through the Form 706 mechanic. Late-life planning that transfers life insurance ownership to an ILIT should be executed as early as possible — ideally more than three years before death — because a within-three-year transfer produces gross-estate inclusion at the death benefit amount, potentially causing more Illinois tax on the estate than the ILIT was designed to save. Sequential ILIT re-issuance rather than transfer is the workaround: buy a new policy inside the ILIT rather than transferring an existing outside policy.

6. Missing the Michigan/Wisconsin/Indiana out-of-state real property complication

Illinois retirees often own vacation property in adjacent states — Wisconsin lake homes, Michigan cottages, Indiana Lake Michigan properties, Florida condos, Arizona snowbird homes. Every parcel of out-of-state real property has its own state situs for estate tax purposes. Most of these states repealed their estate taxes years ago (Wisconsin 2013, Michigan 2005, Indiana 2013, Florida never had one, Arizona 2005), so no additional state tax applies. But if any of these states reinstates an estate tax in the future — as several have discussed — the out-of-state property would face its own filing and tax obligation on top of Illinois. The standard planning insurance is retitling out-of-state real property into a state-of-domicile LLC owned by the Illinois revocable trust, converting the situs from real property to intangible LLC interest for future estate tax purposes.

Illinois estate tax pre-death action checklist

The single most important state estate tax planning fact pattern in 2026

OBBBA's permanent $15 million federal exemption solved the political-cliff problem for federal estate tax but did nothing for the 12 states plus DC that still impose their own estate tax. Illinois is the second-largest of those state systems by aggregate revenue, and the mismatch between the $4 million Illinois exemption and the $15 million federal exemption is the single most important state estate tax planning fact pattern in 2026. Every Illinois couple with $4 million to $30 million of combined assets owes zero federal estate tax and material Illinois estate tax, and Illinois-specific planning — bypass trust, Illinois QTIP separate election, ILIT-owned life insurance, lifetime Roth conversions, systematic annual-exclusion gifting — is the entire game.

The mechanics are settled. 35 ILCS 405 has been unchanged since Public Act 96-1496 in 2011 (which added the Illinois QTIP separate election) and Public Act 96-1496 also set the $4 million exemption effective January 1, 2013. HB2368 in the 104th General Assembly proposes rate restructuring but not an exemption increase. The pre-2001 §2011 credit table is the rate schedule, capped at 16 percent, and the Illinois Attorney General's Form 700 calculator produces the exact tax to the dollar. CalcLeap's estate tax calculator implements the same schedule with statutorily exact math for Illinois plus three other §2011 states (Massachusetts, Maine, Rhode Island) and top-marginal-on-excess approximation for the other eight jurisdictions.

The planning is achievable at reasonable cost. A bypass trust plus Illinois QTIP election requires competent estate planning counsel (typical fee $3,000 to $8,000 for a middle-market estate) and coordination with retirement account beneficiary designations. An ILIT requires attention at the three-year window and coordination with the underlying life insurance carrier. Lifetime Roth conversions require federal tax cost from a separate cash source but produce dollar-for-dollar Illinois estate tax base reduction plus permanent removal of future growth from the estate. Systematic annual-exclusion gifting is nearly free at reasonable dollar amounts and shrinks the estate below the exemption over time.

None of this is aggressive planning. All of it is the routine application of Illinois estate tax law that has been on the books for over a decade, combined with the newly-permanent federal exemption framework enacted by OBBBA in July 2025. The families that most benefit are Illinois retirees in the OBBBA orphan zone who currently assume the $15 million federal exemption ended their estate tax exposure — the exact set of families now facing $200,000 to $1.5 million of Illinois estate tax that a bypass trust and an Illinois QTIP election would eliminate. If that describes your situation, the numbers are worth the two-hour meeting with an Illinois estate attorney to run them.

Frequently asked questions