The History of Estate-Related Taxes in Indiana

Estate-related taxation in Indiana has evolved significantly over time. It began with the introduction of the inheritance tax in 1913. Unlike an estate tax, which applies to the total value of a decedent’s estate, the inheritance tax was levied on the specific amounts beneficiaries received. The tax amount a beneficiary paid was determined by two major factors:
 

• The value of their inheritance.
• Their relationship to the deceased.

Close relatives, such as spouses, children, and parents, generally benefited from favorable tax treatment, often paying minimal to no taxes. In contrast, more distant relatives or unrelated individuals faced higher tax rates on their inheritance.
 

Estate Tax vs. Inheritance Tax: Key Differences

Understanding the distinction between estate and inheritance taxes is essential for estate planning:
 

• Estate Tax: A tax levied on the entire value of a deceased person’s estate before it is distributed to beneficiaries.
  
• Inheritance Tax: A tax on the individual portions that beneficiaries receive from the estate, with tax rates often influenced by the beneficiary’s relationship to the deceased.

Indiana exclusively used an inheritance tax and operated under this system for almost a century. The federal government, on the other hand, introduced the estate tax in 1916, which applies to estates nationwide, including those in Indiana.
 

Indiana’s Inheritance Tax Structure and Exemptions

Under Indiana’s inheritance tax law, the amount of tax a beneficiary paid was directly tied to their familial relationship with the deceased. Beneficiaries were categorized into three classes:
 

1. Class A: Immediate family members, including spouses, children, parents, and grandparents, received the highest exemptions and lowest tax rates.
   
2. Class B: Extended family members like siblings, nieces, and nephews were eligible for smaller exemptions and faced higher tax rates.
   
3. Class C: Unrelated individuals had the lowest exemptions and the highest tax rates.

For example, before the tax was repealed, a spouse or child could inherit significant assets with little to no tax burden, whereas an unrelated person might face taxes on much smaller inheritances.

Repeal of Indiana’s Inheritance Tax

By the early 2000s, estate and inheritance taxes were falling out of favor in many U.S. states. This shift was driven in part by significant increases in the federal estate tax exemption, which reduced the number of estates subject to federal taxes. As a result, death-related taxes became less popular politically, and states began eliminating them to attract wealthier residents and retirees.

In Indiana, this trend led to the passing of Senate Enrolled Act 293, which repealed the state’s inheritance tax. Signed into law by then-Governor Mitch Daniels in 2012, the tax was gradually phased out and fully repealed for deaths occurring on or after January 1, 2013. The repeal was retroactive to this date, meaning that any inheritance received from someone who passed away on or after January 1, 2013, was no longer subject to Indiana inheritance tax.

The decision to repeal the inheritance tax was motivated by several factors:
 

• Simplifying the state’s tax code.
  
• Making Indiana more attractive to wealthy individuals and retirees, especially those who might relocate to states without death-related taxes.
  
• Reducing the financial burden on small estates, particularly family-owned farms and small businesses.
  

Why Indiana Never Adopted a State Estate Tax

Unlike some other states, such as New York and California, Indiana never imposed a state-level estate tax. This decision was likely influenced by a variety of factors:
 

• Impact on Larger Estates: Estate taxes are considered more burdensome on larger estates because they tax the total value of the estate rather than the portions beneficiaries receive.
  
• Economic Competitiveness: Estate taxes can discourage investment and wealth retention within a state, prompting high-net-worth individuals to move to more tax-friendly jurisdictions.
  
• Federal Estate Tax: Since the federal government already imposes an estate tax, Indiana may have opted not to create an additional layer of taxation, allowing federal authorities to handle estate taxes.

Effects of the Inheritance Tax Repeal

The repeal of Indiana’s inheritance tax in 2013 had several significant impacts:

• Financial Relief for Families: Residents no longer had to worry about inheritance taxes, which provided financial relief to many families, especially those inheriting small estates or family-owned businesses.
• Business and Estate Planning Benefits: Wealthier residents were able to plan their estates without the concern of state-level inheritance taxes, making Indiana more competitive with other states that had already eliminated such taxes.
• Federal Estate Tax Remains: Despite the repeal of Indiana’s inheritance tax, the federal estate tax still applies to estates exceeding the federal exemption limit. For 2024, this limit is set at $12.92 million per individual, meaning wealthier Indiana residents still need to plan carefully if their estates exceed this threshold.

Indiana’s Current Tax Structure for Estates and Inheritances

Today, Indiana is among the states that impose neither an estate tax nor an inheritance tax, making it a relatively favorable location for residents concerned with estate planning and wealth transfer. This tax-free environment, combined with other economic benefits, has made Indiana an attractive destination for those looking to reduce their overall tax burden, particularly for retirees and individuals engaging in estate planning.

While Indiana does not have state-level taxes on estates or inheritances, residents with substantial assets must still engage in thoughtful estate planning, especially if their assets exceed the federal estate tax exemption. Without careful planning, a significant portion of a large estate could be lost to federal taxes, meaning heirs may inherit far less than anticipated.

Indiana’s approach to estate-related taxes is unique, having relied on an inheritance tax for nearly a century before repealing it in 2013. Today, Indiana residents need only consider the federal estate tax, positioning the state as a favorable environment for estate planning and wealth preservation. As tax laws continue to evolve, Indiana remains an attractive option for individuals looking to minimize tax liabilities and protect their assets for future generations.