Can an Illinois Resident Reduce Estate Tax by Buying Out-of-State Real Estate?
Clients sometimes ask a very practical question: “If Illinois taxes estates over $4 million, can I just buy a house in another state and move enough money out of Illinois to get below the Illinois estate tax limit?”
For example, a client with approximately $5.5 million of assets may consider buying a $1.5 million home in Florida, Michigan, Wisconsin, Indiana, or another state. The idea is that if only $4 million remains “in Illinois,” the estate should no longer be subject to Illinois estate tax.
The answer is that this idea has a grain of truth, but it is not as simple as it sounds.
Out-of-state real estate can matter for Illinois estate tax purposes. But buying a house in another state is not a magic switch that automatically eliminates Illinois estate tax exposure. Illinois estate tax planning requires looking at residence, asset situs, ownership structure, probate, liquidity, marital planning, and the long-term purpose of the property.
If you are considering this type of strategy, it should be part of a broader Illinois estate tax planning conversation rather than a stand-alone tax move.
The Basic Illinois Estate Tax Problem
Illinois has its own estate tax. This tax is separate from the federal estate tax. Many Illinois families are not federally taxable but still need to consider Illinois estate tax because the Illinois threshold is much lower.
The Illinois estate tax exclusion amount is $4 million. For Illinois families with a home, retirement accounts, brokerage accounts, life insurance, business interests, and other assets, reaching that level is more common than many people expect.
There is another important trap: Illinois does not have federal-style portability for married couples. Without proper planning, a married couple may fail to use both spouses’ Illinois estate tax exemptions. That is why married couples with meaningful Illinois estate tax exposure often need to consider separate trusts or a credit shelter trust structure. I discuss that issue in more detail in my article on whether a husband and wife should have separate trusts.
Why the Out-of-State House Strategy Sounds Appealing
The appeal is easy to understand. Illinois generally looks at the situs of property when determining what portion of an estate is taxable by Illinois. For an Illinois resident, most assets are treated as having Illinois situs. That includes bank accounts, investment accounts, business interests, retirement accounts, and many other intangible assets.
But real estate physically located in another state is different. If an Illinois resident owns a home in another state, that out-of-state real estate may be treated differently from Illinois-situs property.
That is why the idea seems attractive. A client may think:
“I have $5.5 million. If I buy a $1.5 million house in another state, then only $4 million remains taxable by Illinois. So I should avoid the Illinois estate tax.”
Unfortunately, the actual analysis is more complicated.
The Problem: Illinois Does Not Simply Ignore the Rest of the Estate
The most important point is this: the Illinois estate tax calculation is not simply a matter of asking whether the Illinois assets are below $4 million.
When an estate includes property outside Illinois, Illinois may calculate a preliminary estate tax as if the estate were entirely located in Illinois. Then the tax is apportioned based on the ratio of Illinois-situs assets to total assets.
In plain English, the out-of-state real estate may reduce the Illinois portion of the tax, but it may not eliminate the Illinois estate tax altogether.
So in the example above, buying a $1.5 million out-of-state home might reduce the Illinois-situs percentage of the estate. But if the overall estate is still worth more than $4 million, the estate may still have an Illinois filing obligation and may still owe Illinois estate tax on the Illinois-situs portion.
That is why I would not describe this as a clean estate tax avoidance strategy. It is better understood as a possible apportionment strategy, and even then only if the facts are right.
Ownership Structure Matters
Another issue is how the out-of-state property is owned.
If an Illinois resident directly owns out-of-state real estate, that is not necessarily the same as owning an interest in an LLC that owns out-of-state real estate. An LLC interest is generally an intangible asset. For an Illinois resident, intangible assets are typically treated as Illinois-situs property.
That distinction can matter enormously.
A client may buy a Florida condo, place it in an LLC for liability or management reasons, and assume the property is outside Illinois for estate tax purposes. But if what the client actually owns at death is an LLC membership interest, the Illinois estate tax analysis may change.
This does not mean LLCs are always wrong. There may be excellent non-tax reasons to use an LLC, particularly for rental property, creditor protection, management, or multi-owner arrangements. But the estate tax consequences must be considered before the structure is chosen.
A revocable living trust may also be part of the analysis. A trust can often help avoid probate, including ancillary probate in another state. That is especially important for families who own real estate in more than one jurisdiction. I discuss the probate issue more generally in Why Is Everyone Trying to Avoid Probate? and How Does Probate Affect Real Estate Transactions?.
Buying Property for Tax Reasons Can Create Other Problems
Even when the estate tax analysis is favorable, buying a house in another state is still a major financial and family decision. It should not be driven only by tax planning.
Clients should consider:
Transaction costs. Real estate commissions, transfer taxes, title fees, inspections, legal fees, and furnishing costs can be significant.
Carrying costs. Property taxes, insurance, association dues, maintenance, repairs, utilities, and travel expenses may offset much of the perceived tax benefit.
Insurance and climate risk. In some states, especially coastal states, insurance costs and availability have become major planning concerns.
Family use. A second home can become a blessing or a burden. Children may not want to use it equally. Some may want to sell it. Others may want to preserve it. These questions should be addressed in the estate plan.
Liquidity. Estate tax, expenses, and administration costs are usually paid with liquid assets. A valuable house does not necessarily help if the estate lacks cash.
Other state taxes. The state where the property is located may have its own estate tax, inheritance tax, property tax, capital gains rules, probate process, or creditor rules.
Probate in another state. Real estate owned outside Illinois can require probate or related administration in that state unless it is properly titled or placed in a trust.
In other words, the tax answer is only part of the planning answer.
Moving Out of Illinois Is a Different Question
Buying a house in another state is not the same thing as changing domicile.
If a client truly moves out of Illinois and becomes domiciled in a state without an estate tax, the Illinois estate tax analysis may change significantly. But domicile is a facts-and-circumstances question. It is not determined only by where a person owns a house.
Relevant facts may include where the client actually lives, votes, files tax returns, maintains a driver’s license, receives medical care, keeps important personal records, claims exemptions, and intends to remain.
For clients who are thinking about leaving Illinois for tax reasons, I recommend reading The Tax Trap of Retiring Out of State and Estate Planning for Relocating Families. Relocation can be a legitimate planning tool, but it should be handled carefully.
Better Alternatives to Consider
For many Illinois families, there are better and cleaner planning options than buying a second home primarily for estate tax reasons.
1. Use Separate Trusts for Married Couples
For married couples, the first question is often whether the estate plan is structured to use both spouses’ Illinois estate tax exemptions. A simple joint trust may not accomplish that goal.
Separate trusts, credit shelter trust planning, and Illinois QTIP planning may allow a married couple to preserve more of the Illinois estate tax benefit. This is often the most direct estate tax planning tool for married Illinois residents.
2. Make Lifetime Gifts Carefully
Illinois does not have a simple, separate gift tax in the same way the federal system does, but taxable gifts can still affect the Illinois estate tax calculation in certain circumstances. Lifetime gifting can be useful, especially when it removes future appreciation from the taxable estate, but it should be coordinated with federal gift tax rules, basis issues, cash flow needs, and family dynamics.
3. Review Life Insurance Ownership
Life insurance can unexpectedly push an estate over the Illinois threshold. If a client owns a large life insurance policy, the death benefit may be included in the taxable estate.
An irrevocable life insurance trust, sometimes called an ILIT, may be appropriate in some cases. This is not necessary for every family, but it can be important when life insurance is a major part of the estate.
4. Consider Charitable Planning
For clients with charitable intent, charitable gifts can reduce estate tax exposure while supporting causes that matter to the family. This should be planned intentionally, not added as an afterthought.
5. Coordinate Retirement Accounts and Trust Planning
Retirement accounts require special attention. Naming a trust as beneficiary can be appropriate in some cases, but it can also create income tax and administrative complications if drafted incorrectly. The estate tax plan and retirement beneficiary plan should work together.
6. Revisit the Plan as Asset Values Change
Illinois estate tax planning is not a one-time calculation. A client may be under the threshold today and over it in five years because of investment growth, home appreciation, life insurance, business value, or an inheritance.
A good estate plan should be reviewed periodically, especially when the estate is near the Illinois threshold.
So, Should You Buy the Out-of-State House?
Maybe. But the question should not be framed as, “Will this avoid Illinois estate tax?”
The better questions are:
Does this property make sense for your life?
Will your family use it?
How will it be titled?
Will it create probate in another state?
Does the other state have tax or creditor issues?
Will the purchase reduce Illinois estate tax, or only partially reduce it?
Would trust planning, gifting, life insurance planning, or charitable planning be more effective?
Will the estate have enough liquidity?
If the property is something you already want for personal, family, or investment reasons, then the estate tax consequences should absolutely be reviewed. But buying real estate solely to move value out of Illinois may create more complexity than benefit.
Key Takeaway
Buying a house outside Illinois can affect the Illinois estate tax calculation, but it is not a simple way to “get under $4 million.” Illinois may still look at the total estate, calculate tax, and apportion the Illinois portion. Ownership structure, domicile, probate, liquidity, and family goals all matter.
For Illinois residents with estates near or above $4 million, the better approach is usually a comprehensive estate tax plan. That may include separate trusts for married couples, careful gifting, life insurance planning, charitable planning, and proper titling of real estate.
At the Law Offices of Robert J. Varak, I help families in Naperville and throughout the Chicagoland area evaluate these issues and create estate plans that are practical, tax-aware, and tailored to the family’s actual goals.
FAQ
Can I avoid Illinois estate tax by buying real estate in another state?
Not necessarily. Out-of-state real estate may reduce the Illinois-situs portion of an estate, but Illinois may still calculate tax based on the total estate and then apportion the tax. The result depends on the size of the estate, the type of asset, and how the property is owned.
Is out-of-state real estate included in an Illinois estate?
For an Illinois resident, out-of-state real estate may be treated differently from Illinois-situs property. But that does not automatically eliminate Illinois estate tax exposure if the total estate exceeds the Illinois threshold.
Does putting out-of-state real estate in an LLC help?
Not always. An LLC interest is generally an intangible asset, which can change the Illinois estate tax analysis. LLC ownership may be useful for other reasons, but it should be reviewed carefully before assuming it improves the estate tax result.
Is moving to Florida or another state better than buying a second home?
Moving can change the estate tax analysis if the client truly changes domicile. But simply buying a home in another state is not the same thing as becoming domiciled there. Illinois may still treat the person as an Illinois resident if the facts show Illinois remains the person’s permanent home.
What is the best way for married Illinois residents to reduce estate tax?
For many married couples, the most important first step is using separate trusts or credit shelter trust planning to preserve both spouses’ Illinois estate tax exemptions. This is often more direct than buying property in another state.