Is my inheritance subject to tax? For most of our clients, the answer to this question is generally “no.” However, it is helpful to know the potential forms of taxation when assets are transferred from the decedent to a beneficiary to better understand why this is the case.
An estate tax is a transfer tax imposed on the entire “portfolio” of an individual at the individual’s death. Individuals with high net worth may be subject to the Federal Estate Tax. The first $11.18 million (in 2018) of the “portfolio” is exempt from federal estate tax. The estate tax is “portable” between spouses. This means that in a married couple situation, if the first spouse does not use his or her entire $11.18 million exemption, the estate of the surviving spouse may use the remainder (provided the surviving spouse makes an “election” on the first spouse’s estate tax return). Consequently, a husband and wife would have no estate tax if their estate is less than $22.36 million.
The Indiana Estate Tax is what is commonly referred to as a “pick up” tax. This means that Indiana picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return. A federal credit for state estate taxes no longer exists; so, no Indiana estate tax is currently in effect.
An inheritance tax is a transfer tax levied on individuals who receive property in excess of their exemption. Indiana repealed its inheritance tax in 2012.
Income tax owed by the decedent on income earned prior to the decedent’s death must be paid by his or her estate.
The estate may also have to file an income tax return to report income earned by estate assets during the administration of the estate. To the extent that the estate distributes income to a beneficiary, the beneficiary will report that income on his or her individual income tax return. The amount distributed will be indicated on a form “K-1” that the Personal Representative will send to the beneficiary. It is important to note that while the beneficiary may pay income tax on his or her share of income earned by the estate, the principal value of the asset is not subject to tax. So, for example, if a beneficiary receives a $100,000 piece of real estate from the decedent, the beneficiary would pay income tax on any rent received on the real estate during the administration of the estate, but would not pay income tax on the value of real estate received.
Besides estate income tax, if a beneficiary receives an asset that realizes income after the death of the decedent, the beneficiary would pay income tax on the amount realized. For example, if the decedent owned an annuity that contained a portion of earnings which the decedent had not paid tax, the beneficiary would have to pay income tax on the deferred portion of the earnings when the beneficiary receives a distribution from the annuity.
Jeff is Certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation, a distinction held by only a handful of lawyers in Indiana. For almost 20 years, he has focused on elder law, estate planning, long-term care planning, Medicaid planning, Veterans Affairs benefits planning, special needs planning, guardianships, and estate administration.