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Taxed to death no more

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Indiana Lawyer Focus

The fate of the inheritance tax in Indiana went from a slow, lingering demise over the next decade to sudden death in the biennial budget lawmakers approved this session.

“My clients are very happy about it,” said Valparaiso estate and transactional attorney Michael B. Miller. “They hate the death tax.”

kraft Kraft

But Miller feels at least a twinge of loss. No more filling out Indiana Inheritance Tax Return IH-6, no more figuring taxes due from heirs based on their relationship to the deceased or exemptions for heirs also based on relationship, and other variables.

“I’m a Sudoku person, a person who likes to do puzzles, so for me it was kind of fun,” said Miller, who also holds an accounting degree. “That part of my practice is going to disappear.” After a moment of reflection, he said, “I guess I won’t miss it.”

There’s been no notable mourning for Indiana’s inheritance tax, which had been scheduled to gradually phase out by 2022. Lawmakers made the repeal of the tax retroactive to the start of the year, so inheritances are not subject to the tax if the grantor died after Dec. 31, 2012.

But attorneys say clients shouldn’t treat the end of the inheritance tax as a reason to forgo estate planning. Paul Kraft, co-founder and senior principal of Frank & Kraft P.C. in Indianapolis, is concerned that some people may wonder what’s left to do now that the tax is gone.

“Clients still really need to have the assets valued as of the date of death,” Kraft said. “That’s still going to be very important.”

Kraft said failing to do so could unwittingly subject beneficiaries to federal tax liabilities. He provided an example: Suppose someone’s parent purchased stock for $10 many years ago but the stock is now worth $100 per share. If the stock isn’t properly valued at the time of the parent’s death, a beneficiary who inherits the stock could face federal capital gains taxes on $90 per share.

“Hopefully clients won’t be lulled into a false sense of security now that the Indiana inheritance tax is gone,” Kraft said. “Death-tax reduction was one of many reasons to do estate planning. There are many, many other reasons people need to realize it’s important to do estate planning.”

Anne Hamilton chairs the Estate Planning and Administration Section of the Indianapolis Bar Association and is of counsel at Kroger Gardis & Regas LLP. She said one of the biggest changes she sees from the elimination of the tax is a greater ability to leave inheritances for people regardless of their relationship.

Indiana’s inheritance tax divided beneficiaries into three classes, and the tax burden was lowest and exemptions highest for immediate family such as children, parents, grandparents and grandchildren. Extended family – nieces, nephews, aunts and uncles, for instance – were taxed at a moderately higher rate, and those who paid the highest inheritance tax were more distant relatives and unrelated beneficiaries.

The highest tax rate on inheritances from immediate family (Class A) was 10 percent for inheritances in excess of $1.5 million, and the first $250,000 was exempt, according to Indiana Department of Revenue spokesman Robert Dittmer. Heirs with distant or no relationship (Class C) faced a minimum rate of 10 percent and a top rate

of 20 percent on sums greater than $1 million, yet only $100 was exempt from taxation for heirs in that class.

Hamilton said the end of the tax probably will change some clients’ decisions about their estates. Some may opt to include a neighbor who provided care, for example.

“It allows the clients to focus without being so concerned about the estate being reduced by taxes,” Hamilton said. “As planners, it allows us to really focus on what they want to do rather than what they ought to do to save taxes.”

hamilton Hamilton

Kraft said elimination of the estate tax will help same-sex couples and unmarried couples, who in the past faced the highest tax rate and received the lowest exemptions. “It probably benefits that population more than anybody,” he said.

Hamilton said she had a client who paid estimated inheritance tax after receiving a benefit from a non-probate estate of a grantor who died in February. The client will be entitled to a refund because the tax was eliminated retroactively. Such occurrences are likely to be rare, attorneys said, because the deadline for estate valuation is nine months after a grantor’s death, so most filings would not yet have been made.

Miller said for most clients, the inheritance tax wasn’t likely to alter their wishes or planning. “I don’t think most decisions are tax-driven. Even most charitable decisions aren’t tax-driven, but certainly it just lifts a cloud over an additional expense that was looming in their minds.”

Indiana’s elimination of the inheritance tax puts it in the majority of states that don’t have tax on inheritances or estates. According to Forbes, Indiana was one of just eight states with an inheritance tax in 2013. Two others – Tennessee and Delaware – are repealing the tax later this year or in coming years. Twelve states had an estate tax or a combination of estate and inheritance taxes.

Elimination of the tax relieves potential burdens for a large group of Hoosiers whose estates were below the federal estate-tax exemption threshold of $5.25 million. Dittmer said that a record 26,000 Indiana inheritance tax returns were filed in 2009, a number that was projected to decline to 16,000 returns this year. The level of scrutiny on those returns is much higher than others.

“Practitioners and (Department of Revenue) staff not only have to have a good working knowledge of inheritance tax statutes, regulations and caselaw, but also probate, trust and property law,” Dittmer said. “The department audits every inheritance tax return regardless of the amount of an individual’s gross estate. Some audits are relatively straightforward while others are very complex.”

The inheritance tax on average raised $158 million annually between fiscal years 2006 and 2012, Dittmer said, but it was projected to bring in far less in the years ahead because of increasing credits and inclusion of more people in the class with the lowest rates. The tax had been projected to raise $126 million in FY2013, he said, and less annually beyond that.•

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  1. Indianapolis employers harassment among minorities AFRICAN Americans needs to be discussed the metro Indianapolis area is horrible when it comes to harassing African American employees especially in the local healthcare facilities. Racially profiling in the workplace is an major issue. Please make it better because I'm many civil rights leaders would come here and justify that Indiana is a state the WORKS only applies to Caucasian Americans especially in Hamilton county. Indiana targets African Americans in the workplace so when governor pence is trying to convince people to vote for him this would be awesome publicity for the Presidency Elections.

  2. Wishing Mary Willis only God's best, and superhuman strength, as she attempts to right a ship that too often strays far off course. May she never suffer this personal affect, as some do who attempt to change a broken system: https://www.youtube.com/watch?v=QojajMsd2nE

  3. Indiana's seatbelt law is not punishable as a crime. It is an infraction. Apparently some of our Circuit judges have deemed settled law inapplicable if it fails to fit their litmus test of political correctness. Extrapolating to redefine terms of behavior in a violation of immigration law to the entire body of criminal law leaves a smorgasbord of opportunity for judicial mischief.

  4. I wonder if $10 diversions for failure to wear seat belts are considered moral turpitude in federal immigration law like they are under Indiana law? Anyone know?

  5. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

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