Death, just as most things in life, is subject to taxes at both the federal and state level. The federal estate tax applies on the value of the assets a person leaves behind. For the year 2008, this tax applies on estates with a total value of $2 million or more. In 2009, only estates valued at $3.5 million or more will be subject to the federal estate tax, and in 2010 the tax is scheduled to be repealed, only to reappear in 2011 in its original form.
The estate tax is levied on the estate and is paid before any assets are distributed to the heirs. An inheritance tax is different, and is charged on the right to receive property by inheritance. An inheritance tax therefore falls on the heirs, or beneficiaries of an estate. The federal government does not charge an inheritance tax, but a few states do, and Indiana is one of them. Indiana also charges a state estate tax.
Who is subject to the Indiana state inheritance tax?
You could be subject to the Indiana state inheritance tax whether or not you are a resident of Indiana. The determining factor is whether the decedent was a resident of Indiana at the time of death, or held real or tangible property in Indiana, if not a resident of that state.
According to the Hamilton County Tax Assessor’s office, the Indiana inheritance tax applies to real estate, which includes land and everything permanently attached to the land, and tangible property located within Indiana that belonged to a decedent who was a resident of Indiana. It also applies to the decedent’s intangible property, regardless of where it is located, when the decedent was a resident of Indiana. Intangible property includes money, deposits, stocks and bonds, and any other types of property interests. The tax also applies to interests in real and tangible personal property located in Indiana if the decedent was not an Indiana resident.
Life insurance proceeds payable to a named beneficiary are not subject to the Indiana inheritance tax. Also excluded are real estate and tangible personal property located outside the state.
For decedents who were residents of Indiana, the inheritance taxes are determined by the Probate Court. For nonresidents who held assets in Indiana, the Inheritance Tax Division of the Indiana Department of Revenue determines the inheritance taxes.
Exemptions and rates
The Indiana Inheritance Tax is charged at progressive rates that increase the more distant your relationship from the decedent. And there are exemptions that decrease the more distant your relationship. In general, the closer your relationship to the decedent, the higher your exemption and the lower your tax rate will be.
A surviving spouse is 100% exempt from the Indiana inheritance tax. Charitable contributions are also eligible for a 100% exemption.
Lineal ancestors such as parents and grandparents, and lineal descendants including children, stepchildren and grandchildren are eligible for an exemption of $100,000 each. According to Monroe Bank, the progressive tax rates that apply on these ‘Class A’ beneficiaries range from 1% to 10% after the exemption.
Brothers and sisters, their lineal descendants such as nieces and nephews, and daughters-in-law and sons-in-law are eligible for an exemption of $500 each. The tax rates on these ‘Class B’ beneficiaries range from 7% to 15% after the exemption. Other persons, including aunts, uncles, cousins, nieces and nephews by marriage, friends, and corporations are eligible for an exemption of $100 each, with tax rates on these ‘Class C’ beneficiaries ranging from 10% to 20%.
Because of the 100% exemption, if a surviving spouse inherits the entire estate, an inheritance tax return does not have to be filed. For other heirs and beneficiaries, an inheritance tax return does not have to be filed if the amount each one inherits does not exceed the exemption amount. For example, if an estate with a value of less than $200,000 is left in equal parts to two children, no inheritance tax would be owed due to the $100,000 exemption each one of them has.
Indiana Estate Tax
The Indiana estate tax is imposed on the value of the decedent’s estate. Many states levy an estate tax for the exact amount of the credit for state death taxes that is allowed on the federal estate tax return. This is often called a “pick-up” tax, in the sense that the states pick up any slack left under the federal estate tax laws.
In Indiana, the estate tax is the difference between the Indiana portion of the credit allowed on the federal estate tax return and the amount of inheritance tax actually paid. If no federal estate tax return has to be filed, or if the amount of the credit for the state death tax on the federal estate tax return is less than the Indiana inheritance tax paid, there should be no Indiana estate tax owed.
How to file
The Hamilton County Tax Assessor’s office points out that according to Indiana law, each estate must file one Indiana Inheritance Tax Return on Form IH-6 on behalf of all the beneficiaries, when the exemptions do not exceed the total value of the estate.
The return is due one year after the decedent’s date of death, and must be filed with the probate court of the county in which the decedent resided. Form IH-6 can be obtained from the county Assessor’s Office, and is also available for download on the Indiana Department of Revenue website at www.in.gov/dor.
The inheritance tax is due 18 months after the date of death. If payment is made within 9 months from the date of death, there is a 5% discount. After 12 months, interest accrues at 10% per year on any unpaid portion.
Potential changes
There could be changes in the states’ estate and inheritance tax laws in upcoming years, as the federal laws change. Some states may decide to decouple themselves from the federal law and keep their own estate and inheritance tax provisions. You can check with your County Tax Assessor’s office or the Indiana State Department of Revenue website for updated information.
Reference:
- Hamilton County Assessor’s Office – Inheritance Tax: www.co.hamilton.in.us
