Monday, May 13, 2013

Retroactive Repeal of Indiana's Inheritance Tax Raises Question Regarding Applicability

A week or so ago, Governor Mike Pence signed into law the state budget, including a repeal of the Indiana Inheritance Tax.  Indiana's Inheritance Tax is not a tax on the estate, but rather a transfer tax, i.e. a tax on the individuals who receive money or property at a person's death. Although it is a tax on the beneficiaries, the estate collects and remits the tax.  Because the amount of the exemption and tax rate depends on how close of a relationship between the beneficiary and the decedent, the tax can be very complex to figure if there are a number of bequests in the will.

In the bill, the Indiana Inheritance Tax is repealed retroactive to January 1, 2013. Clearly any person who died after that time, his or her estate will be governed by the new rules. However, given the minimum time an estate can be opened was reduced from five to three months several years ago, it is possible that a few estates opened in early 2013 have been closed and paid the inheritance tax for which a refund is now owed.

But what about the estates in which the decedent died before January 1, 2013 and the estates are still open?   The quick answer would be that the estate has to collect and remit the inheritance tax.

But is that right?  Again, the Indiana Inheritance Tax is not a tax on the estate.  It is a tax on beneficiaries who are transferred money and property at the conclusion of the probate proceeding.  I would argue that the inheritance tax should not be collected on any estate closed after 1/1/2013.  I expect, however, the Indiana Department of Revenue will choose a different interpretation.  Given how hard this tax can hit unmarried couples, I also expect this issue will end up in litigation.

1 comment:

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