Indiana and Congress Just Revolutionized Estate Planning

In Spring 2013, Governor Pence signed legislation that eliminated Indiana’s inheritance tax. Earlier in 2013, the US government approved a $5.25 million federal estate exemption with “portability”.

Portability means that on the first spouses’ death, the estate can file a return that transfers any unused portion of the first spouse’s exemption to the surviving spouse. Together, a couple can shelter $10,500,000 of assets from federal tax, adjusted annually for inflation.

This is a sea change of major proportions in regards to estate planning. Further, it was unimaginable in December 2012. At that time the federal exemption was supposed to go down to $1 million and the state inheritance tax was not scheduled to change at all.

Most Hoosiers have not woken to its implications. Here are a few examples of recent changes to federal and Indiana estate inheritance tax laws:

  • Credit shelter trusts, also called B trusts or Family Trusts after the death of the first spouse have almost no meaning for tax purposes. Before January 2013, their existence could often be justified to pay for themselves through inheritance tax savings. Without an inheritance tax, that benefit vanishes. Except in the case of blended families, asset protection or very large estates, credit shelter trusts will often not be worth the complexity they add to a plan;
  • Credit shelter trusts currently in use by surviving spouses with estates well under $5 million should be evaluated to determine if the annual income tax and distribution planning requirements are worth the maintenance effort;
  • Income tax and capital gains tax planning becomes more important. Capital gains tax rates are going up. The “step-up in basis” remains to provide adjustment up to fair market value for assets at the time of death from a lower purchase price. It can also protect against a pregnant capital gains tax in the asset. Unmarried and married estate planners should instead consider how assets are titled at the time of either partner’s death, as a strategy to minimize the resulting income taxes and capital gains.

For more information about how recent federal and Indiana legislative changes impact estate planning in 2013 and beyond, contact us.

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