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A primary focus of estate planning is deciding you want your estate assets to be distributed after you are gone. It is important, however, that you also focus on protecting those assets during your lifetime and at the time of your death. Specifically, you need to make sure you understand how taxes might impact your estate. To help you, the estate planning attorneys at the Frank & Kraft have created several frequently asked questions and answers relating to avoiding estate taxes. If you have specific questions about taxes or incorporating tax avoidance into your estate plan, feel free to contact our office to schedule a consultation.
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The federal gift and estate tax is essentially a tax on the transfer of wealth. Every estate is potentially subject to the federal gift and estate tax; however, every taxpayer is also entitled to an exemption. Federal gift and estate taxes are levied on the combined total of the value of all gifts made during a taxpayer’s lifetime and the value of all assets owned by the taxpayer at the time of death. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent.
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While every taxpayer’s estate is subject to federal gift and estate taxes, a handful of states also impose an estate tax. Fortunately, Indiana does not impose a state level gift and estate tax. If you own property in another state, however, you would be wise to find out if that state imposes a state level estate tax because your property in that state could be subject to the tax.
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An estate tax is a tax imposed on the estate of a deceased individual. An inheritance tax is a tax imposed on an individual when they inherit assets. An estate tax must be calculated and paid by the estate using estate assets prior to any assets being passed down to beneficiaries or heirs. An inheritance tax is paid by the beneficiary or heir after those estate assets have been passed down. Indiana does not impose an inheritance tax.
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Each 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. While in office, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. The temporary increase in the lifetime exemption amount presents an opportunity for those with significant taxable assets to transfer more of that wealth without incurring taxes over the next few years.
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Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. For examples, imagine that Sam and Lisa are married. Sam passes away in 2021 leaving behind an estate valued at $9 million. Sam’s estate would use $9 million of his lifetime exemption. Any remaining exemption would “port” over to Lisa. Lisa would then have her lifetime exemption plus any of Sam’s that “ported” over to her that can be used when Lisa’s estate is probated.
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The annual exclusion is an extremely beneficial tax avoidance tool that allows each taxpayer to gift up to $15,000 in assets to an unlimited number of beneficiaries each year tax-free. Couples can gift-split and gift assets valued at up to $30,000. By way of illustration, a married couple with four children could transfer $120,000 in assets each year without using any of their lifetime exemption.
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Contact Us
If you have additional questions or concerns about avoiding estate taxes in the State of Indiana, contact an experienced Indianapolis, Indiana estate planning attorney at Frank & Kraft. by calling (317) 684-1100 to schedule your appointment today.
