Voelz, Reed & Mount LLC – Will My Heirs Owe Inheritance Or Other Taxes When I Die?

Q:  Will My Heirs Owe Inheritance Or Other Taxes When I Die?

A:   Not Likely

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  Indiana repealed its inheritance tax laws altogether in 2013.

Assets such as real estate and most investments receive a stepped up tax basis so that heirs do not owe Capital Gains Tax either.

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. 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 2023, an individual can pass $12.92 million in assets to loved ones free of estate tax.  Married couples can pass as much as $25.84 million in assets free of estate tax.

According to IRS data, only 6,158 estate tax returns were filed in 2021 in the United States and only 2,584 of those resulted in estate tax being due.  Considering that 3.46  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 or make other changes, 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. Married couples who have estates that are valued at more than $12 million may want to consider a more complex estate plan that may include spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs) or various charitable trust options.

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 account owner 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.

Contact Voelz, Reed, & Mount, LLC in Columbus about estate planning techniques that may help to avoid or reduce taxation.