Indiana Inheritance Tax

Posted on June 06, 2011 by Attorney Josh Cook

Most people are probably aware that a deceased person’s property usually passes to a surviving spouse or the deceased’s children at death.  However, many people may not realize the State of Indiana, as well as many other states and the federal government, impose a death tax that is based on the value of the property which the deceased person owned at death.  Depending on the size of the estate, death tax liability could be a few hundred dollars to several hundred thousand dollars or more; however, if the only property that a person owned at death was an old vehicle, clothes and other personal items, and a bank account with a few hundred dollars of cash in it, then the death taxes will probably not be very significant.

Death taxes are generally broken down into two categories based on the person or entity that is liable for paying the tax.  When the persons receiving property that had belonged to the deceased person are liable for the death tax, which is the case in Indiana, the tax is generally referred to as an “inheritance tax.”  When the deceased person’s estate is liable for the death tax, which is the case for the federal death tax, the tax is generally referred to as an “estate tax.” 

Since there is currently a $5 million (up to $10 million with portability for married couples) federal estate tax exemption (absent action by Congress, the exemption amount will fall to $1 million in 2013 with a 55% tax rate), the estates of most people dying in 2011 and 2012 will probably not owe federal estate death taxes.  Because of the high federal estate tax exemption, most people may think that they do not need to worry about death taxes.  But not so fast!  There is also Indiana’s inheritance tax to consider.

Indiana’s inheritance tax has the potential to affect estates that are well below the $5 million federal estate tax threshold.  The person that receives property from an estate (a “beneficiary”) is liable for paying the inheritance tax.  The inheritance tax imposed on each beneficiary is determined by the total value of the property that the beneficiary receives less any applicable exemptions.  The following chart summarizes the exemptions available for each “class” of beneficiaries:

                            Indiana Inheritance Tax Exemptions

 The following is a table that describes the beneficiaries that fall into each class: 

Additionally, a surviving spouse has an unlimited exemption and transfers made to entities organized for religious, charitable, scientific, literary, or educational purposes are generally exempt from inheritance tax.  The following table summarizes some of the applicable inheritance tax rates for each class of beneficiaries:           

Unlike the gift tax imposed by the federal government on a person that makes lifetime gifts meeting certain requirements, Indiana does not impose a tax on lifetime gifts. As a result, gifts made during a person’s lifetime may be an effective method of reducing the size of a person’s estate (and thereby reducing the amount of inheritance tax) by:  (1) removing property from the estate, and (2) removing any future appreciation of the gifted asset from the person’s estate. 

Federal gift tax consequences should be considered prior to developing a gifting plan.  The federal gift tax laws impose a tax on certain gifts made by a person.  The tax imposed is payable by the person making the gift.  However, the federal government does not require a person to pay taxes on all gifts; too large of a burden would be placed on taxpayers if they had to file a gift tax return each year and pay taxes based on birthday or Christmas gifts that they may have purchased for their family members or friends.  The first $13,000 (up to $26,000 for married couples) of gifts of present interests in property made to any person may be excluded from the total amount of gifts made during the year.  Gifts of future interests in property for the benefit of minors qualify for the annual exclusion as long as the gifts meet certain requirements.  Any gifts made to a person in excess of the applicable exclusion amount may result in the person making such gifts being required to file a federal gift tax return.  However, there is currently a $5 million gift tax exemption so that annual gifts to a person that exceed $13,000 would likely not require the person making the gift to pay any taxes with respect to the gifts unless the person had already used up the entire exemption on past gifts. 

With attention to the annual exclusion and exemption amounts, an effective estate plan that works within the framework of the federal gift tax laws can reduce the burdens of the Indiana inheritance tax and help maximize the amount of property that a person’s beneficiaries receive at death.

Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company.  The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice.  The information on this website should not be relied upon to make any decision, legal or otherwise.  If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state.  The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.