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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. This law is troubling in two respects: First, why wasn't the law reviewed "with the intention of getting all the facts surrounding the legislation and its actual impact on the marketplace" BEFORE it was passed and signed? Seems a bit backwards to me (even acknowledging that this is the Indiana state legislature we're talking about. Second, what is it with the laws in this state that seem to create artificial monopolies in various industries? Besides this one, the other law that comes to mind is the legislation that governed the granting of licenses to firms that wanted to set up craft distilleries. The licensing was limited to only those entities that were already in the craft beer brewing business. Republicans in this state talk a big game when it comes to being "business friendly". They're friendly alright . . . to certain businesses.

  2. Gretchen, Asia, Roberto, Tonia, Shannon, Cheri, Nicholas, Sondra, Carey, Laura ... my heart breaks for you, reaching out in a forum in which you are ignored by a professional suffering through both compassion fatigue and the love of filthy lucre. Most if not all of you seek a warm blooded Hoosier attorney unafraid to take on the government and plead that government officials have acted unconstitutionally to try to save a family and/or rescue children in need and/or press individual rights against the Leviathan state. I know an attorney from Kansas who has taken such cases across the country, arguing before half of the federal courts of appeal and presenting cases to the US S.Ct. numerous times seeking cert. Unfortunately, due to his zeal for the constitutional rights of peasants and willingness to confront powerful government bureaucrats seemingly violating the same ... he was denied character and fitness certification to join the Indiana bar, even after he was cleared to sit for, and passed, both the bar exam and ethics exam. And was even admitted to the Indiana federal bar! NOW KNOW THIS .... you will face headwinds and difficulties in locating a zealously motivated Hoosier attorney to face off against powerful government agents who violate the constitution, for those who do so tend to end up as marginalized as Paul Odgen, who was driven from the profession. So beware, many are mere expensive lapdogs, the kind of breed who will gladly take a large retainer, but then fail to press against the status quo and powers that be when told to heel to. It is a common belief among some in Indiana that those attorneys who truly fight the power and rigorously confront corruption often end up, actually or metaphorically, in real life or at least as to their careers, as dead as the late, great Gary Welch. All of that said, I wish you the very best in finding a Hoosier attorney with a fighting spirit to press your rights as far as you can, for you do have rights against government actors, no matter what said actors may tell you otherwise. Attorneys outside the elitist camp are often better fighters that those owing the powers that be for their salaries, corner offices and end of year bonuses. So do not be afraid to retain a green horn or unconnected lawyer, many of them are fine men and woman who are yet untainted by the "unique" Hoosier system.

  3. I am not the John below. He is a journalist and talk show host who knows me through my years working in Kansas government. I did no ask John to post the note below ...

  4. "...not those committed in the heat of an argument." If I ever see a man physically abusing a woman or a child and I'm close enough to intercede I will not ask him why he is abusing her/him. I will give him a split second to cease his attack and put his hands in the air while I call the police. If he continues, I will still call the police but to report, "Man down with a gunshot wound,"instead.

  5. And so the therapeutic state is weaonized. How soon until those with ideologies opposing the elite are disarmed in the name of mental health? If it can start anywhere it can start in the hoosiers' slavishly politically correct capital city.

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