Q: My sister recently passed away naming her sisters as the sole beneficiaries of a sizeable estate. Also, 10 months ago, she made a gift to me. Does the gift have to be reported and is it subject to inheritance tax? Is there a way to limit the inheritance tax on the siblings?
A: As I've indicated in many columns, the Indiana Inheritance Tax is a distributive tax. The Inheritance Tax is based upon what a beneficiary actually receives, rather than the total value of the estate.
Not only is the tax based upon what you receive, the amount of the exemption and the tax rates are based upon the relationship of the decedent and the beneficiary. As a general rule, the closer the relationship, the larger the exemption and the lower the tax rate. Beneficiaries are broken into three general classifications: Class A, Class B and Class C. Spouses are exempt.
-- Class A beneficiaries are generally lineal ancestors and descendants such as parents, children and grandchildren. Step children and lineal descendants of stepchildren are also Class A beneficiaries. Class A beneficiaries receive a $100,000 exemption and the tax rate starts out at 1 percent.
-- Class B beneficiaries are generally relationships that fall horizontally such as siblings, nieces and nephews. Also included as Class Bs are spouses, widows and widowers of children. Class B beneficiaries receive a $500 exemption and the tax rate starts out at 7 percent.
-- Class C beneficiaries are generally people that aren't blood relations. Class C beneficiaries receive a $100 exemption and the tax rate starts out at 10 percent.
The reader is clearly a Class B beneficiary, unless she is a sister-in-law.
As for the gift, the presumption is that gifts made within one year of the date of death were made in anticipation of death and are therefore subject to Inheritance Tax. The presumption is rebuttable. If you can prove that the gifts were not made in anticipation of death, they could be excluded. You'll need to be persuasive.
To reduce the taxation, there are a couple of things you can do. First, if you pay the tax within nine months of the date of death, you will receive a 5 percent discount. Not a lot of money, but it's better than a kick in the butt.
You can also reduce taxation by maximizing deductions. Keep track of things that are paid on the decedent's behalf, which may have resulted from her death. Funeral expenses, debts, attorney and accountant fees are generally deductible. If you're not sure if something is deductible, check the Indiana Code under sections 6-4.1-3- et al. You can also find some direction in the Indiana Administrative Code under 45 IAC 4.1-3- et al. The Department of Revenue looks closely at deductions, so don't be too creative.
The final way to reduce the taxation is to reduce the taxable value. Look at the assets and determine if they can be valued at a lower price. Real estate usually has an appraised value and a sales value. If the selling price is lower than the appraised value, you can use it to reduce the taxation. You can also deduct many of the most common costs associated with the sale.
Good luck with the return.
Opinions expressed solely are those of the writer. Christopher W. Yugo is a member of the Indiana Bar and a vice president and senior trust Officer for First National Bank's Trust Department. Address questions to Yugo in care of The Times, 601 W. 45th Ave., Munster, IN, 46321. Yugo's information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant or estate-planning specialist.
