Indiana inheritance tax repeal to aid some farm beneficiaries

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The repeal of Indiana's Inheritance Tax has the potential to help farm families who have valuable land, equipment and monetary assets, a Purdue Extension agricultural economist says.

The repeal, signed into law May 8, is backdated to take effect Jan. 1, 2013.

"The inheritance tax was an issue for those transferring more than modest wealth to heirs and for transfer to perhaps unrelated parties," Gerry Harrison said.

Prior to the repeal, Class A beneficiaries, who include children and grandchildren, were tax-exempt on the inheritance up to $250,000. Anything over that amount was subject to taxation.

Class B beneficiaries, including close relatives such as siblings or nieces and nephews, had a $500 exemption and tax rates ranging from 7 to 15 percent. Class C beneficiaries, or unrelated parties, had only a $100 exemption, and tax rates ranged from 10 to 20 percent.

The problem for beneficiaries was that a farm inheritance often includes land and equipment. Without an additional cash inheritance, beneficiaries would have to come up with the money to cover inheritance tax bills.

For example, in 2012 three siblings who inherited a parcel of farmland valued at $1 million from a friend of the family faced an inheritance tax of about $100,000.

"Farmland market values have risen a lot in recent years," Harrison said. "Many farmers and landowners who have retired from farming or inherited land with plans for just a few beneficiaries would have an estate that faced significant Indiana inheritance tax. For example, an acreage valued at $4.5 million (after allowable deductions and assuming no federal estate tax) going to three children would have a tax per child of $72,250, for a total of $216,750."

The repeal of the Indiana inheritance tax doesn't affect the federal inheritance tax. But the current federal estate credit is equal to the tax on a $5.25 million inheritance. That means, currently, only a few Indiana beneficiaries will face an estate tax liability.

Harrison was quick to point out that this doesn't mean estate administration is free or that estate planning isn't still vitally important.

"Appraisals of property values, income tax liabilities and legal work will generally be significant costs for handling a decedent's estate," he said. "But for many estates where only the Indiana inheritance tax liability was an issue, the repeal of the inheritance tax is also, potentially, an administrative savings for a decedent's estate."

Harrison is available to provide more information on estate planning and to help Indiana residents figure out what the repeal of the state's inheritance tax means for individual estates. He can be reached at 765-494-4216 or harrisog@purdue.edu. He also suggested contacting an attorney for more details.



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