Indiana Inheritance Tax

Indiana imposes a tax on certain people who inherit money or other property when someone dies. It doesn’t matter how large the entire estate is; the tax is based on the relationship of the inheritor to the deceased person and how much the inheritor receives.

The Indiana inheritance tax is gradually being phased out over ten years, beginning in 2012. See Senate Bill 923 for all the details.

Who Must File an Inheritance Tax Return

You’ll need to deal with Indiana inheritance tax if you are administering the estate of:

• an Indiana resident, or
• a nonresident who owned real estate or tangible property located in Indiana.

The personal representative (executor) is responsible for filing an inheritance tax return. If there’s no probate court proceeding, and so no personal representative has been appointed, then an heir, trustee, surviving joint owner, or other inheritor may file. Just one return is filed, even if several inheritors owe inheritance tax.

When and Where to File

The tax return (Form IH-6) is due nine months from the date of death. (If you’re also filing a federal estate tax return, and the IRS grants an extension, Indiana automatically grants the same extension.) A personal representative who doesn’t file the return on time can be removed by the probate court—and is subject to a fine of 50 cents a day or $50, whichever is less, unless the court finds that there was a justifiable excuse for not filing the return on time.

The tax return lists all property that the deceased person owned, and its value as of the date of death. (You can, however, use an alternate valuation date if you do so for federal estate tax purposes as well.) It also lists who inherits the property and each person’s relationship to the deceased person.

The tax return is filed with the probate court of the county in which the deceased person resided at the time of death. If a probate court proceeding is being conducted, it will be in that county as well. When you file the return, you must attach copies of:

• the will, if any, and
• the federal estate tax return, if one was filed.

The payment is made to the county treasurer. If the tax isn’t paid within 12 months after the death, interest begins to accrue on unpaid tax.

Who Owes Indiana Inheritance Tax

The surviving spouse and charitable organizations pay no Indiana inheritance tax, no matter how much money or other property they inherit. Other inheritors are classified into three groups:

Class A includes parents, children, stepchildren, grandparents, grandchildren, and other lineal ancestors and lineal descendants. People in this class don’t pay tax unless they inherit more than $100,000. For deaths occurring July 1, 2012 or after, Class A also includes the spouse, widow, or widower of a child or stepchild, and the exempt amount is $250,000.

Class B includes brothers, sisters, lineal descendants of brothers or sisters, and daughters- and sons-in-law. They owe inheritance tax on amounts over $500.

Class C includes everyone else, including but not limited to aunts, uncles, cousins, friends, nieces and nephews by marriage, and corporations. Anyone in Class C who inherits more than $100 must pay tax.

Calculating the Tax

First, figure out how much each beneficiary must pay tax on. That’s the amount the person inherited, minus the exempt amount. For example, a child who inherits $300,000 would owe tax on $200,000 because Class A beneficiaries don’t pay tax on the first $100,000 they inherit.

The second step is to multiply that amount by the appropriate tax rate. The tax rate depends on both what class the beneficiary belongs to and the amount inherited.

For example, say a man leaves $250,000 to his daughter and $10,000 to his brother’s son.  The daughter is a Class A beneficiary, with an exemption of $100,000. She’ll pay $750 plus 3% of the amount over $50,000, for a total tax of $3,750. The nephew is in Class B, so he owes tax on the amount over $500. His tax rate is 7%, so he’ll owe $665.

If No Inheritance Tax Is Due

If no inheritance tax is due, the personal representative should file an affidavit (sworn statement) stating that no tax is due. The “Affidavit of No Inheritance Tax Due” is a fill-in-the-blanks form (Form IH-Exem), available from the state Department of Revenue website. If the estate contained real estate, recording this affidavit with the county recorder terminates the automatic statutory lien (claim) on the real estate for inheritance tax.

Forms, Instructions, and More

You can get inheritance tax return forms, instructions, and current tax rates from the Indiana Department of Revenue website. You’ll also want to get legal advice on your particular situation from an Indiana lawyer who has experience with filing inheritance tax returns.