Bloomington, Indiana Estate & Elder Law Blog

Friday, March 23, 2012

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.


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