Q: How Do I Avoid Taxes at Death?

A:   You May Not Need To

When it comes to estate planning, a concern that many people have is how to avoid taxation at death.  Most of us want to transfer as many of our assets as possible to our loved ones, churches, or charities after our deaths while paying as little tax as possible.  The good news is that most Hoosiers’ estates are not subject to taxation when they die.

Indiana does not have a state inheritance tax.  Indiana repealed its inheritance tax laws altogether in 2013.

While Federal Estate Tax still exists, the exemption amounts are so high that very few individuals owe estate tax.  The first big increase in Federal Estate Tax exemption occurred in 2011, when the exemption was raised to $5 million per person and grew each year with inflation.  This was also the first year in which married couples could take advantage of both spouses’ exemption amounts by electing portability.  In 2018 the exemption amount increased again to $11.18 million per person.

In 2022, an individual can pass $12.06 million in assets to loved ones free of estate tax.  Married couples can pass as much as $24.12 million in assets free of estate tax.

According to IRS data, only 6,409 estate tax returns were filed in 2019 in the United States and only 2570 of those resulted in estate tax being due.  Considering that 2.85 million deaths were reported in the United States for that same year, the risk of owing Federal Estate Tax at death is slim to none.

While the current Federal Estate Tax exemption is set to reduce after 2025 unless Congress chooses to make it permanent, the reduced exemption in 2026 would still allow individuals to pass approximately $6 million in assets free of Federal Estate Tax, $12 million for married couples.

Income tax on individual retirement accounts (IRAs) is often the most impactful tax on a beneficiary.  IRAs and other qualified plans trigger income taxation when distributions are taken whether by the owner of the account during lifetime or by beneficiaries after death.  Naming a church or charity as beneficiary on retirement accounts can be a great way to avoid income taxation and do a little good in the world.

You should talk with your estate planning attorney and/or financial advisor about planning techniques that may help to avoid or reduce taxation.