If you live in Indiana and see the words “Indiana inheritance tax” you may very well wonder why anyone would bother talking about a now-repealed form of taxation. For while the state did at one time levy that tax on inheritances, that old system of taxation was retroactively repealed in a law that went into effect in 2013. For heirs whose loved ones passed away after January 1, 2013, no inheritance tax is due. But does that mean that your future inheritance is free from any inheritance tax concerns? Unfortunately, life is seldom that simple. The fact is that your inheritance could still be at risk for taxation under certain circumstances.
But How is That Possible?
Well, the most obvious way that your inheritance could still be subject to the Indiana inheritance tax is if your loved one passed away prior to January 1, 2013. The old tax system still applies for estates of decedents who died prior to that date, so if your loved one’s estate has been tied up in probate for more than four years – an extremely rare event, of course, but not beyond the realm of possibility – then your inheritance could still face some level of tax.
But let’s dismiss that possibility, since it’s unlikely that you’re facing that sort of rare circumstance. Even if your loved one passed away after the effective repeal date, it is still possible that your inheritance could be subject to taxation based on an inheritance tax. How, you might ask? It’s actually simple: while Indiana repealed its own inheritance tax, that repeal had no effect on the other six states that continue to levy their own taxes on inheritance – namely, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Here’s how that might work in your particular case. If your loved one lived in one of those six states and left you an inheritance – whether money or some form of physical property – that bequest might trigger an inheritance tax levy. In like manner, if your loved one left you assets located in one of those six states, that inheritance could also be subject to that state’s tax. In those instances, your residency in Indiana would have no impact on whether your inheritance ends up being taxed. The determining factors are where your loved one lived and where the property was located.
Other Factors that Determine Tax Liability
Of course, even if you know that a future inheritance could be subject to one of those states’ inheritance tax laws, that still doesn’t mean that you’ll have to pay a tax. Each of those six states has its own unique laws defining which heirs actually get taxed, and the rate at which those taxes get levied. For example:
- If you’re the spouse of the deceased, then you’d be exempt from any inheritance tax in all six of those states. In addition, the state of New Jersey doesn’t collect the tax for domestic partners who inherit money or property.
- A few states also exempt the deceased’s parents and children from inheritance taxes. The rest of those states use lower tax rates when levying the tax on those family members.
- The Iowa tax only applies to inheritances resulting from estates worth more than $25,000. In Maryland, the tax is only levied if the estate’s total value is more than $30,000.
- Estate tax rates vary from state to state. The lowest rate is in Nebraska, which has a tax rate range that begins at 1%. Oddly enough, Nebraska also boasts the highest rate as well, with its upper bracket of 18%.
- Throughout the six states with inheritance taxes, there are different rates applied to different classes of heirs. Grandparents, nieces, aunts, uncles, and others all pay using the tax rates applicable to their class.
How to Determine Whether Your Inheritance Will be Subject to the Tax
If all of that seems more than a little confusing to you, then know that you’re not alone. It’s not uncommon for Indiana residents to be surprised by an unexpected inheritance tax obligation. As a rule, however, you can be pretty certain that your inheritance will only face the tax if you meet these criteria:
- Your loved one must have lived in an inheritance tax-collecting state or owned property in one of those states; and
- You must be in an heir class that is subject to the tax. Obviously, if you’re the spouse of the decedent, you’re automatically exempt in all six inheritance tax states.
In other words, if your loved one never lived in or owned property in a state with the inheritance tax, then your inheritance won’t be subject to any inheritance tax. By the same token, even if the deceased did live in or owned property in one of those six states, you still won’t owe inheritance taxes if you are in an exempt class of heirs.
Protecting Yourself from the Inheritance Tax
If you’re concerned that your inheritance could be subject to the inheritance tax, there are some options that you can take to minimize that tax impact. The simplest option is to talk to your loved one while he or she is still alive to discuss steps that can help to minimize or avoid the tax. That could mean receiving your inheritance early, through various gifting techniques. Alternatively, your loved one could include a provision in his or her will to ensure that the estate pays any inheritance taxes that may be due.
Indiana residents who are concerned about potential inheritance tax issues should always consult with an experienced estate planning attorney. Though there is no longer an Indiana inheritance tax to worry about, that doesn’t mean that those taxes are no longer a concern for heirs in the state. At Frank & Kraft, Attorneys at Law, our experienced team can work with you and your loved ones to help identify any potential inheritance tax concerns and mitigate their impact on your family. If you’re concerned that inheritance taxes could negatively impact your bequest, call today at (317) 684-1100, or contact us at our website.
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.