Indiana Inheritance Tax Repeal (Actually a Phase Out)

On March 20, 2012, Governor Daniels signed into law a phase out of the Indiana inheritance tax.  First, a little background may be helpful.  For many, many years Indiana has had an independent inheritance tax. This tax is technically a tax on the heir/beneficiary when that person receives an inheritance. The actual amount of tax depends upon the relationship of the heir/beneficiary to the decedent.  Hopefully you will recall that there is no tax on any amounts passing to a spouse.  For lineal descendants (children, grandchildren, step-children, step-grandchildren, etc.) and for lineal ancestors (parents, grandparents, etc.) there was a $100,000 exemption. Amounts inherited above $100,000 would be taxed at rates ranging from 1% to 10%.  These lineal descendants and ancestors were called “Class A” beneficiaries by the Indiana Department of Revenue.

The new law does a few things.  First, it add a spouse, widow, or widower of a child or step-child as a Class A beneficiary.  Second, it increases the exemption for Class A beneficiaries to $250,000.  This change was made retroactive to decedents dying after December 31, 2011.  The third change is the gradual repeal of the inheritance tax.  This was done through a credit to the actual tax owed which credit increases by 10% each year beginning in 2013 through 2021.  Beginning in 2022 the inheritance tax would cease to exist.  As an example, if a parent dies in 2013 with a $1,000,000 estate which is divided equally between two children. Each inherits $500,000. The first $250,000 for each child would be exempt.  The other $250,000 inherited by each child would incur a tax of $7,250.  In 2013 there would be a 10% credit against this tax (which is $725) and thus the actual tax owing for each child would be $6,525.  If the person died in 2014 the law applies a 20% credit against the tax ($1,450) and thus the actual tax on each child would be $5,800.

Unfortunately this new law does not increase the paltry exemptions available to Class B beneficiaries (brothers, sisters, nieces, nephews, etc.) which is only $500 nor does it increase the exemption for Class C beneficiaries (everyone who is not a Class A or Class B beneficiary – such as a friend) which is only $100.

The fact that this legislation got passed is somewhat of a surprise. There have been proposals to repeal our state’s inheritance tax many times in the past and it never got anywhere.  This time was different although the full repeal will take many years to materialize.

The Death of a Billionaire – George Steinbrenner Owner of the NY Yankees

On July 13, 2010, George Steinbrenner, the owner of the New York Yankees, died.  It has been widely reported that 37 years ago he bought the Yankees for about $10 million.  The Yankees are now reported to be worth $1.6 billion.  He became the face of the Yankees, butted heads with several of his managers, other team owners and the commissioner of baseball through the years.  He was known as the “Boss” and moved the Yankee team from the “House that Ruth Built” to the “House that the Boss Built” as the team moved to a new Yankee Stadium in 2009.

Mr. Steinbrenner appears to also have been the fourth billionaire to die in 2010, joining Dan Duncan, Mary Janet Morse Cargill, and Walter Shorenstein as the U.S. billionaires who have died in 2010. So why is this significant?  Well, if you have been following this blog and the news on the federal estate tax you know that there is no federal estate tax on the wealth of those that die this year.  He is likely the most famous of the billionaires to have died this year and will add a public face to the estate tax debate.  For some, his death will represent a loss of hundreds of millions of dollars of tax revenue.  (For an analysis of Mr. Steinbrenner's estate issues see this Forbes entry).  For the opponents of the estate tax, his death illustrates the benefit many small business and family farms could receive if the estate tax was permanently repealed.
There was a recent Wall Street Journal article titled “Too Rich to Live?” which may be of interest to you.  A few years ago I heard a speaker jokingly talk about 2010 as being the “Push Mamma from the Train” year for wealthy individuals.  Hopefully this will remain a joke.  I hope we don’t hear a story about a family trying to decide if perhaps “daddy is just to rich to live beyond 2010.”

Will Congress Act on the Estate Tax?

Former Treasury Secretary Robert Rubin will join others in urging Congress to reinstate the estate tax before the August recess.  Apparently this event will be held on July 21, 2010 and Rubin is expected to discuss his reasons to support a permanent fix to the estate tax.  See more of this report at The Hill.

In 2009 the estate tax exemption was $3.5 million.  However, due to a quirk in the law that was passed in 2001 the estate tax expired in 2010.  Thus, anyone dying in 2010, even billionaires, will pay no federal estate tax.  However, like Cinderella’s carriage turning back into a pumpkin, on January 1, 2011 the estate tax is set to be reinstated with only a $1 million exemption.  Despite rumors and other information that Congress would fix this issue they have failed to do so.

Again, stay tuned.  I am sure there will be more to this story later.

Estate Tax Deal Falls Apart

It appears that a reported agreement between Senate Democrats and Republicans on an estate tax proposal has fallen apart.  It now appears even more likely that we may actually return to a 55 percent maximum estate tax rate and $1 million exemption beginning January 1, 2011.
The details of the reported agreement have not been made public.  However The Hill reports that there would be a 35 percent tax rate for estate in excess of $3.5 million, increasing to $5 million over time.

According to The Hill , Senator Jon Kyl (R-Ariz) said the deal broke down because of Senate Democrats' would not allow legislation to reach the floor that lacked the support of a majority of its members.
"We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they're not going to allow it on the floor, at least not voluntarily," Kyle said. "So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it."
It now appears any estate tax reform will not happen any time soon and we face the very real possibility of a return to the $1 million exemption and 55 percent tax rates.  Again, stay tuned.
For more details on the breakdown in click here for another article.

More Rumblings About the Estate Tax

I subscribe to various list serve’s that are specific to estate planning, tax and elder law issues. Today a colleague of mine posted that he had recently heard Prof. Jeffrey Pennell, of Emory Law School, speak about this issue. Prof. Pennell is a very well respected law professor and his thoughts are not to be taken lightly. In any event, Pennell apparently opined that he did not think we would have any legislation on estate tax reform this year, that the estate tax law changes passed in 2001 would indeed sunset on January 1, 2011, and we would return to an estate tax exemption of only $1 Million.

If in fact we return to a planning world with only a $1 Million estate tax exemption, there appear to be many winners, and perhaps a few losers.


Democrats – more money to help with the deficit and high priority (and costly) legislation

Republicans – a proven effective fund raising issue (eliminate or lessen the impact of the "death tax")

States – reinstitution of the state death tax (sponge or pick-up tax) provides states with much needed revenue

Insurance Companies (always a strong lobbying group) – increase use of ILITs to provide liquidity for payment of estate tax and preservation of estate

Charities – more motivation for charitable playing (CRTs, CLTs and private foundations)



Unfortunately, that means that my clients and their families could very well  be losers in this whole debate.  Again, stay tuned to see if we actually do get some legislation passed.


Possible Estate Tax Proposal Forthcoming?

Despite promises by our congress that estate tax reform would be a priority in the new year, as of yet, nothing has happened. It has been reported that Senate Minority Whip Jon Kyl (R-Ariz) is working on an estate tax proposal. This article from The Hill discussed that proposal which would set the estate tax exemption at $3.5 Million with increases up to $5 Million over time and tax rates of 35%. It was not clear how much success this would have of passing with the pay-go rules that may require corresponding "off-sets" to the proposal. Stay tuned.

They Said It Couldn’t Happen

Effort to Extend Estate Tax Fails

According to a Wall Street Journal article at the Senate has failed to pass a patch to the estate tax laws that would have kept the estate tax from expiring in 2010. Apparently the Democrats favored keeping the 2009 levels in place (a $3.5 million exemption and a 45% tax rate) whereas the Republicans favored a $5 million exemption and a 35% top rate. It is possible that passage of a new law in 2010 will be made retroactive to January 1, 2010.
It appears that issues such as whether College Football should institute a playoff system may be deemed more important by our Congress than trying to address the issue of estate taxes. See

Stay tuned. Hopefully there will be some legislation early next year that will provide some certainty to the estate tax issue.