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Indiana's inheritance tax phasing out

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The Indiana Legislature passed a law during the 2012 session that will gradually phase out the state’s inheritance tax by allowing a credit against the amount of taxes owed.

The initial credit, beginning on July 1, will be 10 percent in 2013 and will increase by 10 percent each fiscal year, reaching 90 percent in 2021, and 100 percent in 2022. The new law also expands the definition of a Class A transferee to include the spouse, widow or widower of the transferor’s child or stepchild. That means people included in the expanded transferee category will be entitled to the same exemptions and lower tax rates that a transferor’s children enjoy.

R.J. McConnell, a partner at Bose McKinney & Evans who is also a member of the estate and wealth management group, explained that the expanded Class A category won’t necessarily change how people plan their estates overall, but it may be important for some families.

mcconnell McConnell

“The good news is, if a family wants to leave money and treat kids and stepchildren the same, they not only receive the same treatment from their parents, but they receive the same treatment from the government,” McConnell said. “I think it’s a wonderful remedy, in the interest of fairness.”

Benefits for those left behind

Beginning this year, the exemption for Class A beneficiaries was raised to $250,000, meaning that each child of a transferee can inherit $250,000 tax-free.

So far, clients aren’t banging at the door to revise their estate plans based on the changes in Indiana law.

Jeanne Longsworth, of the Fort Wayne firm Longsworth Law, concentrates her practice on wealth transfer, estate planning and associated areas of law.

“It’s way too early. I don’t think the general population understands what the phase-out is … the phase-out is over a nine-year period of time,” she said. “I haven’t had anybody coming in and saying, ‘Let’s rethink this.’”

She said that the most present concern for her clients is the federal estate tax.

“I would say for the majority of clients I work with, the federal tax is the really burdensome one because of the rates,” she said.

Currently, federal law taxes estates at 35 percent, with the first $5 million exempt from taxation. But that is likely to change soon.

“All that goes out the window on January 1 if Congress doesn’t do something,” McConnell said. Without intervention, the exempt amount will be $1 million, and the tax rate will revert to 55 percent, as it was in 2001.

“It’s a train wreck – particularly for families with illiquid assets like farmland or businesses,” McConnell said. “The $5 million exempts from tax 98.5 percent of all Americans. But there are a lot of families whose estate, whose business, whose farm ground is exempt from tax today, but would be subject to tax in January if the exemption goes down to $1 million. It would just be a huge unfairness.”

Protecting assets from penalties

The fact that 2012 is an election year causes further questions about whether the federal estate tax law may change. Some wealthy parents are therefore choosing to make lifetime gifts to their beneficiaries this year rather than run the risk that their estates will be subject to a much higher tax rate in the future. This year, the gift tax exemption is $5 million.

McConnell said the concept of portability will also disappear in 2013 without legislative intervention.

“Portability says that if you don’t use the entire exemption in the estate of the first to die, it’s portable and can be used in the second estate – meaning, that if dad did nothing, mom would have $10 million of exemption portability.”

That means that the mother would then be able to pass on to her children that entire $10 million tax-free.

Before the change in Indiana’s inheritance tax law, families leaving property to heirs had to weigh the pros and cons of paying inheritance tax early, at a lower rate, or risking a greater tax penalty for heirs, should the property continue to go up in value. Now, knowing that the inheritance tax is fading away, that’s no longer a concern.

“It’s basically kicking the can down the road until presumably the tax is gone,” McConnell said.•

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  • unnecessary
    This was an unnecessary change in law, a needless fiddling with a tax that impacted very very few hoosiers, but one that erodes a tax base benefitting very many hoosiers. Just because some people wanted to chalk up a "tax cut" on their legislative brag-list, and didnt give a fig about replacing the revenue any other way. Really stupid. I am a republican my whole life and this just shames me like hell. I have to use a fake name over this because I know my fellow republicans are all brain washed over tax cutting too.

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  1. A traditional parade of attorneys? Really Evansville? Y'all need to get out more. When is the traditional parade of notaries? Nurses? Sanitation workers? Pole dancers? I gotta wonder, do throngs of admiring citizens gather to laud these marching servants of the constitution? "Show us your billing records!!!" Hoping some video gets posted. Ours is not a narcissistic profession by any chance, is it? Nah .....

  2. My previous comment not an aside at court. I agree with smith. Good call. Just thought posting here a bit on the if it bleeds it leads side. Most attorneys need to think of last lines of story above.

  3. Hello everyone I'm Gina and I'm here for the exact same thing you are. I have the wonderful joy of waking up every morning to my heart being pulled out and sheer terror of what DCS is going to Throw at me and my family today.Let me start from the !bebeginning.My daughter lost all rights to her 3beautiful children due to Severe mental issues she no longer lives in our state and has cut all ties.DCS led her to belive that once she done signed over her right the babies would be with their family. We have faught screamed begged and anything else we could possibly due I hired a lawyer five grand down the drain.You know all I want is my babies home.I've done everything they have even asked me to do.Now their saying I can't see my grandchildren cause I'M on a prescription for paipain.I have a very rare blood disease it causes cellulitis a form of blood poisoning to stay dormant in my tissues and nervous system it also causes a ,blood clotting disorder.even with the two blood thinners I'm on I still Continue to develop them them also.DCS knows about my illness and still they refuse to let me see my grandchildren. I Love and miss them so much Please can anyone help Us my grandchildren and I they should be worrying about what toy there going to play with but instead there worrying about if there ever coming home again.THANK YOU DCS FOR ALL YOU'VE DONE. ( And if anyone at all has any ideals or knows who can help. Please contact (765)960~5096.only serious callers

  4. He must be a Rethuglican, for if from the other side of the aisle such acts would be merely personal and thus not something that attaches to his professional life. AND ... gotta love this ... oh, and on top of talking dirty on the phone, he also, as an aside, guess we should mention, might be important, not sure, but .... "In addition to these allegations, Keaton was accused of failing to file an appeal after he collected advance payment from a client seeking to challenge a ruling that the client repay benefits because of unreported income." rimshot

  5. I am not a fan of some of the 8.4 discipline we have seen for private conduct-- but this was so egregious and abusive and had so many points of bad conduct relates to the law and the lawyer's status as a lawyer that it is clearly a proper and just disbarment. A truly despicable account of bad acts showing unfit character to practice law. I applaud the outcome.

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