Taxes that can come into play when assets are being transferred can be confusing. You have probably heard of the estate tax, and you may assume that an inheritance tax and an estate tax are the same thing.
In reality, these are two different forms of taxation. We will look at the distinctions in this post, and we will focus on taxes that can impact Indiana residents.
Estate Tax
An estate tax would be imposed on the entire taxable portion of the estate in question. Some states in the union have state-level estate taxes, but fortunately, there is no state-level estate tax in Indiana.
Though there is no state-level estate tax in our state, high net worth individuals who reside in the state of Indiana are potentially exposed to the federal estate tax. The tax is applicable on asset transfers that exceed $5.43 million (this is the figure for 2015) if you are transferring assets to anyone but your spouse.
There is an unlimited marital deduction that enables you to transfer unlimited monetary assets to your spouse free of taxation.
The key thing to understand about an estate tax is that it is levied on the entire taxable portion of the estate. It is not levied on each individual asset transfer to nonexempt inheritors.
Inheritance Tax
An inheritance tax would in fact be levied on individual transfers to nonexempt inheritors. To explain by way of example, let’s say that you are subject to an inheritance tax. You are leaving assets to three different nieces. Each niece could be required to pay an inheritance tax.
There is no federal inheritance tax, but there are a handful of states that impose state-level inheritance taxes. We had an inheritance tax in Indiana, but it was repealed. The tax is not applicable if the decedent passed away after December 31st of 2012.
At the present time, there are only six states that still have inheritance taxes. They are New Jersey, Maryland, Pennsylvania, Nebraska, Iowa, and Kentucky.
Tax Efficiency
You should certainly have a comprehensive understanding of the taxes that may be applicable when you are planning your estate. People who are exposed can take steps to gain transfer tax efficiency.
There are various different ways that you can position your assets with tax efficiency in mind. The optimal strategy will vary depending upon the circumstances.
Given the complexity of the federal and state tax laws, you probably have questions, and this is understandable. We offer free consultations to people in the greater Indianapolis area, and we would be glad to assist you if you are concerned about taxation or any other estate planning matter.
To set up an appointment, send us a brief message through this page: Indianapolis IN Estate Planning Attorneys.
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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