When most people think about estate planning, they think about making decisions regarding the distribution of their estate assets when they are gone. While that is certainly an important part of an estate plan, it shouldn’t be the only consideration when you create your estate plan. For example, the impact taxes will have on your plan should also be taken into consideration. An Indianapolis estate planning attorney at Frank & Kraft discusses whether you need to worry about an Indiana inheritance tax.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is a tax that is imposed by the federal government on all qualifying gifts made by a taxpayer during his/her lifetime and all assets owned by the taxpayer at the time of death. For example, if you made gifts of assets during your lifetime valued at $4 million and you owned assets valued at $6 million at the time of your death, your estate would be subject to federal gift and estate taxes for the combined value of $10 million at a tax rate of 40 percent. Therefore, without any deductions or planning ahead for the impact of taxes on your estate, your estate would lose a shocking $4 million to federal gift and estate taxes. Any federal gift and estate taxes that are due from your estate must be paid during the probate of your estate after your death.
The good news is that every taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. In 2018, President Trump signed tax legislation into law that changed the lifetime exemption amount for several years to come. Under the new law, the exemption amounts doubled. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation.
Do States Impose an Estate Tax?
Although every taxpayer is potentially subject to federal gift and estate taxation, each individual states decides whether state residents are also subject to a state level estate tax. In most states that impose an estate tax, the tax is similar to its federal counterpart. For example, most states only tax estates valued over a certain dollar value. As of 2020, 12 states plus the District of Columbia impose an estate tax; however, the State of Indiana is not one of them.
What Is an Inheritance Tax and Does Indiana Impose One?
People often use the terms “estate tax” and “inheritance tax” interchangeably when, in fact, they are distinct types of taxation. Although both impose a tax on assets left behind by a decedent, the similarities end there. Gift and estate taxes – both at the federal and state levels– are calculated based on the total value of probate assets left behind by a decedent. If a decedent’s estate does owe estate taxes, that tax must be paid during the probate of the estate using available estate assets. For example, if Jose passed away and left behind an estate valued at $15 million, the full amount (minus the lifetime exemption) would be subject to federal (and sometimes state) estates taxes and the tax must be paid prior to the assets leaving the estate.
An inheritance tax, on the other hand, is a tax imposed only on the value of assets inherited from an estate by a beneficiary. Moreover, the tax is paid by the beneficiary after the assets have been transferred out of the estate. Using the above example, imagine that Jose was a resident of a state with an inheritance tax and that he bequeathed $3 million to his daughter Sandra. Sandra would be responsible for paying the tax. As of 2020, only six states impose an inheritance tax. Although the State of Indiana did once impose an inheritance tax, the tax was repealed for deaths that occurred after 2012.
Contact an Indianapolis Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about estate planning and taxes, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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