Illinois residents preparing for retirement may face an often overlooked financial hurdle: the state’s estate tax, which can take a substantial portion of assets from families and businesses if proper planning is not in place, financial advisor Scott Tucker said.
Tucker, a retirement planner who advises clients on tax and estate strategies, said many Illinois residents are unaware that the state imposes an estate tax once an estate surpasses a $4 million threshold. While the tax does not apply at exactly $4 million, even exceeding the threshold by a small amount can trigger a significant tax bill.
“If someone passes away with $4 million and one penny, nearly $300,000 could go to the state,” Tucker said, describing how the tax can come as a surprise to families that assumed their assets were below the taxable level.
Unlike an inheritance tax, which is paid by the recipients of an estate, Illinois’ estate tax is assessed on the value of the estate itself before assets are distributed. Some states impose both types of taxes, but Illinois currently applies only the estate tax.
Tucker said the tax often catches families off guard because rising property values and long-term savings can push estates over the threshold over time.
“Someone might have a net worth of $1 million today,” Tucker said. “Ten years from now it might be $2 million, and ten years after that it could be $4 million.”
For couples, planning becomes even more important because Illinois estate tax law differs from federal estate tax rules. Under federal law, the exemption for married couples can be transferred between spouses through a concept known as portability. Illinois does not automatically allow this, meaning couples must plan ahead to ensure they can take advantage of a higher exemption level.
Tucker said one approach used by planners involves establishing specialized trusts designed to preserve the exemption for both spouses, effectively doubling the threshold to $8 million.
Such strategies typically require coordination with attorneys and financial professionals to structure the trust properly and ensure it meets legal requirements.
“If you’re a couple with assets approaching that level, you need a plan in place,” Tucker said.
The tax has also drawn criticism from farmers and small business owners who say it can force families to sell property or businesses in order to pay the tax bill.
Family farms are particularly vulnerable, Tucker said, because the land value alone can push estates above the threshold even if the farm itself generates modest income.
“If a farm gets valued above the exemption, heirs may have to sell acreage just to pay the tax,” he said.
Small business owners can face a similar challenge. Businesses valued above the threshold may have to be sold entirely because there is often no practical way to sell off a small portion of the business to cover the tax liability.
Critics also argue that the estate tax encourages wealthy residents to relocate to states with lower taxes or no estate tax at all.
Tucker said Illinois’ estate tax generates only a small share of the state’s revenue, estimated at roughly 1 percent of the overall budget.
“For such a small amount of revenue, it’s a policy that pushes people to leave the state,” he said.
Beyond estate planning, Tucker also warned that many Americans underestimate the taxes they may face during retirement.
A common assumption among retirees is that they will fall into a lower tax bracket after they stop working. In practice, Tucker said many retirees experience higher tax bills several years into retirement, particularly if most of their savings are held in tax-deferred accounts such as traditional IRAs and 401(k)s.
When retirees begin withdrawing money from those accounts, the withdrawals are treated as taxable income. Those withdrawals can also increase the portion of Social Security benefits that becomes taxable at the federal level.
Up to 85 percent of Social Security benefits can be subject to federal income tax depending on a retiree’s overall income.
“People often think their taxes will drop in retirement,” Tucker said. “In many cases, they actually rise.”
Tucker said strategies such as Roth conversions and other tax planning techniques can help reduce taxable income later in retirement, potentially lowering overall tax burdens.
The conversation also touched on the long-term future of Social Security. While Tucker said the program is unlikely to disappear entirely, he raised concerns about possible policy changes in the coming decades.
One possibility, he suggested, is means testing, where higher-income retirees could receive reduced benefits if policymakers determine they do not need the payments.
“My concern is that people who saved diligently for retirement could eventually be told they no longer qualify,” Tucker said.
Despite those uncertainties, Tucker emphasized that proactive financial planning can help retirees manage both state and federal tax challenges.
“Whether it’s estate taxes or retirement income taxes, the key is having a strategy before those problems show up,” he said.