by Brooke C. Jones July, 2012
It is a day that no one wants to experience, but all families will have to deal with the death of a family member at one point or another. After the funeral, the family has to cope with the lurking task of handling the estate. Will there be enough left to keep the farm or business in the family? These are details most people do not wish to think about, but if planning is left unattended, their loved ones could end up paying more taxes than they otherwise would after they are gone. There are two types of taxes to consider when engaging in estate planning: federal estate tax and Indiana inheritance tax. With changes in both federal and state tax laws already in place or coming up in 2013, many families may benefit from taking another look at their current estate plans.
Federal estate tax is a tax based upon the assets owned by a person as of the date of his or her death. This upcoming year, federal estate tax is scheduled for a number of changes. Unless tax laws are changed before the end of the year, the federal estate tax exemption will decrease from $5 million to $1 million as of January 1, 2013. Not only will the federal estate exemption be reduced, but the estate tax rate will increase from 35% to 55%.
Since 2012 is an election year, the federal estate tax is reemerging as an issue. Many of those affected by the changes in estate tax are family business owners and farmers who face having to pay drastic tax increases if the estate tax isn't amended. President Obama is pushing for a $3.5 million exemption at a tax rate of 35%. Meanwhile, the Death Tax Repeal Permanency Act was introduced by John Thune, senator from South Dakota, seeking to permanently end the federal estate tax. However the election goes, chances are changes will be made to the federal estate tax that will affect estate plans currently in place.
The General Assembly in Indiana also passed legislation this year that changes Indiana's inheritance tax. Legislators passed a law phasing out Indiana's inheritance tax over the next ten years, beginning in 2013. The inheritance tax exemption for lineal descendants increased from $100,000 to $250,000 effective January 1, 2012, and was broadened to include more family members. Under the new law, daughters-in-law, sons-in-law, and stepchildren are eligible for the $250,000 exemption. Previously, these family members were only entitled to an exemption of $500.
One of the concerns of the legislature in passing this law was how Indiana will make up the loss of revenue resulting from the inheritance tax phase out. The law is written in a way that will allow the inheritance tax to be phased out sooner if Indiana is able to offset the revenue loss quicker. One of the ways Indiana hopes to make up losses from inheritance tax is by placing a tax on items purchased through websites such as Amazon.com. The changes made to Indiana's inheritance tax simultaneously allow for a more inclusive inheritance for modern families while also reducing the tax rate each year.
What do all of these changes mean for your estate plan? It might be a good idea to take a look at your current plan and see if it needs adjustment. With the possibility of such high increases in the federal estate tax as well as a huge reduction on the exemption, there may be planning alternatives that could reduce the amount of tax your family would pay in the event of your death. On the other hand, Indiana's changes to the inheritance tax allow for more family members to receive larger exemptions while slowly phasing out inheritance tax entirely. Taking a little time to review your estate plan now could save your loved ones time and frustration later - not to mention a significant amount of money.
Allen Wellman McNew Harvey, LLP, has several attorneys that regularly practice in the area of estate planning. If you would like to have your estate plan reviewed, please contact us to schedule an appointment.