Two estate taxes, not one
Securities are offered through Cetera Wealth Services, LLC, member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. This material is general information and is not individualized investment, tax, or legal advice. Neither Cetera Wealth Services LLC nor any of its representatives may give legal or tax advice; estate planning documents must be prepared by an attorney.
Most coverage of estate tax is about the federal version, and for most households the federal version is no longer the concern it once was. Federal law now sets a very high exemption per person, indexes it for inflation, and allows a surviving spouse to use whatever the first spouse left unused.
Illinois runs its own system under the Illinois Estate and Generation-Skipping Transfer Tax Act, and it works differently on every one of those points. The exclusion is fixed in statute at $4 million per person under current law. It is not indexed, so it does not move when prices or asset values rise. And it is not portable, so a surviving spouse does not inherit the first spouse's unused amount.
The two taxes are calculated and filed separately. The Illinois return is administered by the Illinois Attorney General's office rather than the Department of Revenue. The result is a band of estates, large enough to exceed the Illinois figure but well below the federal one, that owe Illinois estate tax and nothing federally.
The federal changes of recent years did nothing to the Illinois threshold. For many Illinois families the state tax is now the only estate tax that applies.
Proposals to raise the Illinois exclusion have been introduced in recent legislative sessions. None has been enacted as of this writing. Plan to current law and confirm it with your attorney each time the plan is reviewed.
The portability problem
For married couples, this is the part that matters most, and it is the part most often missed.
A very common estate plan leaves everything outright to the surviving spouse. Transfers between spouses are covered by the unlimited marital deduction, so no estate tax is due at the first death under either system. At the federal level the first spouse's unused exemption can then be carried over to the survivor through a portability election, which requires filing a federal estate tax return at the first death even when no tax is owed.
Illinois has no equivalent. When everything passes outright to the survivor, the first spouse's Illinois exclusion simply goes unused. At the second death, the combined estate has one Illinois exclusion to set against it rather than two.
The consequence is that two people whose combined estate would owe no Illinois tax if the first exclusion had been preserved can leave an estate that does. The fix is not complicated, but it has to be put in place while both spouses are alive, which is why it belongs in the conversation long before it becomes urgent.
What counts toward the estate
People reliably underestimate their estate, because they think about what is in the will rather than everything they own.
| Asset | Included? | Note |
|---|---|---|
| Primary residence and other real estate | Yes, at fair market value | Decades of appreciation on a Chicago-area home often account for much of the total |
| IRAs, 401(k)s, and other retirement accounts | Yes, at full value | Included even though they pass by beneficiary designation rather than the will |
| Brokerage and bank accounts | Yes | Including accounts titled jointly, in proportion to ownership |
| Life insurance you own | Yes, the death benefit | Policies owned by an irrevocable trust are generally outside the estate |
| Business interests | Yes, at appraised value | Valuation is its own discipline and worth doing before it is needed |
Debts, qualifying administration expenses, charitable bequests, and transfers to a surviving spouse reduce the taxable estate. Your attorney calculates the figure; this table is for orientation.
The life insurance line surprises people most often. A policy bought to provide liquidity for heirs can itself be the thing that pushes an estate over the threshold if it is owned personally rather than through a trust.
Retirement accounts, taxed twice over
Tax-deferred retirement accounts sit at an awkward intersection. They are counted in the estate at their full balance, and the income tax that was deferred on them has still not been paid. That income tax falls on whoever inherits them, as they withdraw.
For a non-spouse beneficiary, the rules for inherited accounts generally require the balance to be withdrawn within a fixed period, often ten years, which can concentrate the income tax into the beneficiary's peak earning years. The estate tax and the income tax are separate bills on the same dollars.
That is one of the reasons partial Roth conversions during the retirement years are often modeled with the estate in mind, not only the retiree's own taxes. Converting pays the income tax during the owner's lifetime, reduces the pre-tax balance the heirs inherit, and the tax paid also reduces the estate. Whether it makes sense depends on brackets now and brackets for the beneficiaries later, which is arithmetic rather than a rule. We cover the conversion window in required minimum distributions.
The planning responses
The responses to the Illinois estate tax are well established. All of them require an estate attorney to draft and most of them require the financial plan to be built around them.
- Trust structures that preserve the first exclusion. Rather than leaving everything outright to the survivor, the plan directs an amount up to the Illinois exclusion into a trust at the first death. The survivor can generally still benefit from it, but it is not counted again at the second death.
- Lifetime gifting. Illinois has no gift tax, so assets given away during life are no longer in the estate Illinois taxes at death. Gifts above the federal annual exclusion require a federal gift tax return and use part of the federal lifetime exemption, but with the federal figure where it is, that rarely creates federal tax.
- Life insurance ownership. Holding a policy in an irrevocable life insurance trust can keep the death benefit out of the estate, provided it is set up and funded correctly.
- Charitable planning. Bequests to charity reduce the taxable estate directly. For people who give anyway, directing retirement account balances to charity and other assets to family can reduce both the estate tax and the income tax the heirs would owe.
- Beneficiary designation review. Retirement accounts and life insurance pass by beneficiary form, not by the will. A carefully drafted trust achieves nothing if the forms send the money somewhere else.
None of these is a do-it-yourself project. The drafting belongs with an Illinois estate attorney. What a financial planner contributes is the projection of what the estate is likely to be, the coordination of titling and beneficiary forms with the documents, and the income plan that makes sure the survivor can still live on what remains after assets are moved into trust.
Where it meets the income plan
The estate tax is a death-time bill, but the decisions that shape it are made during retirement. Which accounts are drawn down first, whether conversions are made, how much is given away, and how accounts are titled all move the eventual estate. That is the practical case for keeping the estate projection inside the retirement income plan rather than in a separate folder.
Illinois income tax treatment points the same way. Illinois does not tax most retirement income, which we cover in fee-based financial advisors in Chicago for retirees, so the state-level planning effort for Illinois households sits largely on the estate side rather than the income side.
Richard Casolari, Financial Advisor, Investment Advisor Representative, CFP®, has spent roughly fifty years in financial services. The practice is founder-led and based in Palos Heights, and the work coordinates retirement income planning, tax-aware withdrawal sequencing and conversion analysis in coordination with your CPA, investment management, and protection planning through licensed affiliates, with estate documents drafted by your attorney, into one written plan.
Fees, charges and expenses are detailed in the Cetera Wealth Services LLC's ADV Part 2A. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services LLC nor any of its representatives may give legal or tax advice.
Securities offered through Cetera Wealth Services, LLC, member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. Insurance products are offered through licensed affiliates.
This material is for general information only and is not a recommendation to buy or sell any security or insurance product, or a solicitation in any jurisdiction where the advisor is not properly registered. The Illinois exclusion amount stated reflects the Illinois Estate and Generation-Skipping Transfer Tax Act as of the date of publication. Federal and state estate tax law, exemption amounts, rates, and gift tax exclusions change; confirm current law with an Illinois estate attorney before acting. Trust and estate planning documents must be prepared by a licensed attorney.
