Miner & Lemon Blog

Tax Savings Series Part 8 - Indiana Inheritance Tax, or One More Reason to Move to Florida

Indiana Inheritance Tax or One More Reason to Move to Florida.

            Jerry Seinfeld once observed "My parents didn't want to move to Florida, but they turned sixty and that's the law."   So why didn't they move to Indiana instead?  Well, maybe it was because the Hoosier state is a little lacking when it comes to palm trees and winters that do not involve weekly blizzard advisories, or maybe it was because Indiana is not lacking when it comes to death taxes.  And now that we have learned a little bit about the U.S. federal estate tax, we will turn our attention to Indiana's inheritance tax.

            Indiana taxes death using an approach that is a little different from that which is used by the federal government.   While the federal government taxes the estate left by the decedent, Indiana taxes the amounts left to individual recipients.  Indiana's inheritance tax scheme is based upon two factors: (1) the relationship between the recipient and the decedent, and (2) the dollar amount given to the particular recipient.  And, again as with the Federal estate tax, any amount given to a surviving spouse is exempt from taxation.

            There are three relational classes, and each class is based upon familial relationship (or lack thereof).  The first is Class A, which includes lineal relatives of the decedent (grandparents, parents, children, grandchildren, etc.).  The second is Class B, which includes non-lineal relatives of the decedent (brothers, sisters, nephews, nieces, sons-in-law, daughters-in-law, etc.).  And, the third is Class C, which includes any other beneficiary of the decedent's estate. 

            The exempt amounts and rates are set so that the tax obligation due as a result of amounts received increases as the relationship between the decedent and the recipient becomes more distant.  The first $100,000 received by a Class A beneficiary is exempt, after which tax will be imposed at a rate beginning at 1% and increasing up to 10%.  The first $500 received by a Class B beneficiary is exempt, after which tax will be imposed at a rate beginning at 7% and increasing up to 15%.  The first $100 received by a Class C beneficiary is exempt, after which tax will be imposed at a rate beginning at 10% and increasing up to 20%.

            As can be seen, Indiana's inheritance tax has the potential to affect estates that are much smaller than those that are subject to the federal estate tax, but Indiana's rates are much lower (remember that for 2009, the federal estate tax rate is 45%).  Also, unlike the federal tax regime, Indiana does not have a gift tax.  This means that gifting can be an effective method of reducing the amount of Indiana inheritance tax that will ultimately be due.  Of course, gifting can result in the imposition of federal tax if not done properly, but recall that in 2009, up to $13,000 ($26,000 for married couples) may be gifted to any number of individuals.  And, obviously, there may be reasons why gifting may not be desirable apart from tax ramifications.  Another way in which the Indiana inheritance tax burden can be lightened is by taking advantage of the differences between amounts that can be left exempt from taxation to recipients in the various classes and the relative applicable tax rates.

            Please join me next time when we will begin a new series: Farming Isn't Just a Way of Life, It is a Business Too.