Indiana Department of Revenue Inheritance Tax Section Indianapolis Bar Association Estate Planning and Administration Section March 28, 2012 Don Hopper,

Indiana Department of RevenueInheritance Tax Section

Indianapolis Bar Association

Estate Planning and Administration Section

March 28, 2012

Don Hopper, Administrator

Tuesday, April 18, 2023

TOPICS TO COVER TODAY

1) 2012 Legislative Update

2) 2011 Inheritance Tax Handbook – aka “The Little Yellow Book”

2012 Legislative Changes

• Senate Enrolled Act 293

1)Increase in Class A Exemption amount

2)Expansion of Definition of Class A Transferee

3)Phase Out of Inheritance Tax

4)Implications for Tax Practitioners

2012 Legislation ImpactingInheritance Tax

• House Enrolled Act 1258

1)Adds definition of “entity”

2)Taxes transfer to “entity” to individuals with a beneficial or ownership interest in that entity

3)Eliminates “patch statutes” in Probate and Trust Codes enacted in 2010

2012 Legislative Changes –Increase in Class A Exemption Amount

SEA 293

• Class A Exemption increasing to $250,000 for decedents dying after 12/31/2011

• Class A Exemption is $100,000 for decedents dying before 1/1/2012

2012 Legislative Changes –Expansion of Definition of Class A Transferee

• Class A – expanded to include spouse, widow or a widower of a child or stepchild of a transferor for decedent who dies after 12/31/2011

• Decedents dying before 1/1/2012 - spouse, widow or widower of:oNatural child – Class B ($500 Exemption)o Stepchild – Class C ($100 Exemption)

2012 Legislative Changes –Phase Out of Inheritance Tax

• 9 year phase out – starting in 2013 and ending in 2022

• Decedents dying during a particular calendar year

• Credit – 10% increments each year starting in 2013

• Tax repealed for decedents dying after 12/31/2021

2012 Legislative Changes –9 Year Phase Out of Inheritance Tax

Year of Death Credit

2012 0%

2013 10%

2014 20%

2015 30%

2016 40%

2017 50%

2018 60%

2019 70%

2020 80%

2021 90%

2022 Repealed

Credit applied when tax Is paid

2012 Legislation ImpactingInheritance Tax

• House Enrolled Act 1258

1)Adds definition of “entity”

2)Taxes transfer to “entity” to individuals with a beneficial or ownership interest in that entity

3)Eliminates “patch statutes” in Probate and Trust Codes enacted in 2010

HEA 1258

SECTION 1. IC 6-4.1-1-3.5 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JULY 1, 2012]: Sec. 3.5. "Entity" refers to a partnership, limited partnership, limited liability partnership, association, corporation, limited liability company, trust, or similar entity.

HEA 1258

"Entity" refers to a:

1) Partnership,

2) Limited Partnership (LP),

3) Limited Liability Partnership (LLP),

4) Association,

5) Corporation,

6) Limited Liability Company (LLC),

7) Trust, or

8) Similar entity.

HEA 1258

SECTION 2. IC 6-4.1-2-8 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JULY 1, 2012]: Sec. 8. If a transferor makes a taxable transfer to an entity, each individual with a beneficial (whether discretionary or not) or ownership interest in the entity is considered a transferee. Each transferee is liable for the same percentage of the taxes imposed on the taxable transfer as that individual's percentage of beneficial (whether discretionary or not) or ownership interest in the entity.

HEA 1258• If a decedent makes a taxable transfer to an

“entity”: Each individual with a beneficial (whether

discretionary or not) or ownership interest in that entity is a transferee

I.e. Tax the individual who has a beneficial or ownership interest in the entity, not the entity

DOR’s prior position was to tax the entity, not the individuals – except for trust

HEA 1258 – Look through the entity to the owners

HEA 1258

• If a decedent makes a taxable transfer to an “entity”:

Each individual with a beneficial (whether discretionary or not) or ownership interest in that entity is liable for the same percentage of the taxes as that individual’s interest in that entity

HEA 1258

• Eliminates “patch statutes” in Probate and Trust Codes enacted in 2010

• Legislature had enacted “patch statutes” since Congress hadn’t acted to extend federal estate tax by the end of 2009

HEA 1258

• “Patch statutes” were enacted to allow estates and trusts of individuals dying in 2010 to use the $3.5M “federal exemption equivalent” enacted by Congress in early 2011

• Repealing “patch statutes” allow estates and trusts of individuals dying in 2010 to use the $5M “federal exemption equivalent” if they file a U.S. Estate Tax Return (Form 706)

2012 Legislative Changes –Implications for Tax Practitioners

• Estates and Estate Planning:

1)More funds to distribute to heirs, less to tax

2)Inheritance Tax implications still have to be considered in estate planning over the next 10 years

3)Consider Class A Exemption increase and use of Exemption (e.g. son-in-law, daughter-in-law) in estate planning


• Preparing Returns:

1)Less Returns to prepare – 33% fewer Taxable Returns

2)Date of Death is all important

3)$250,000 Class A Exemption is retroactive to January 1, 2012

4)$100,000 Class A Exemption for individuals dying before January 1, 2012


• Preparing Returns:

5)Unchanged – tax rates and way of computing tax

6)Credit doesn’t go into effect until 2013

7)Redo Instructions to IH-6 and IH-12 – Receipts

8)Establishing asset basis for long-term capital gain?

2011 Indiana Inheritance Tax Handbook

“Little Yellow Book”


Sections of Little Yellow Book

1)IH Tax Statutes with Indiana case law

2)IH Tax Regulations with Indiana case law

3)Frequently Asked Questions

4)Taxation of Trust Distributions

5)10% Present Value Tables (October 1, 1988 – IRS)

6)Comparison of 706 and IH-6

Hot Button Issues

• Current Developments in IH Tax• Common Issues IH Tax Section sees• Changes in practices by IH Tax Section• Most of these issues are addressed in the Little

Yellow Book to some extent• Highlight Hot Button issues and explain more

fully

Top 10 Hot Button Issues

1) Residency

2) Joint Property

3) Gift in Contemplation of Death

4) 529 Plans

5) Business Valuations

6) Real Estate Valuations

7) Step Grandchildren

8) Additional Assets

9) Refunds

10)Taxation of Trust Distributions

Residency/Domicile(Page 71 of LYB)

Residency/Domicile

• Inheritance tax applies to the transfer of ALL property owned by a RESIDENT decedent

• Exception: non-Indiana real estate and non-Indiana tangible personal property

Who is a RESIDENT?

• "Resident decedent" means an individual who was domiciled in Indiana on the date of the individual's death (45 IAC 4.1-1-13)

• Domicile means “the place where a person has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning” • State Election Board v. Bayh, 521 N.E.2d 1313 (Ind.1988) (citing

Culbertson v. Board of Commissioners of Floyd County, 52 Ind. 361, 366 (Ind. 1876).

Who is a NONRESIDENT?

• "Non-resident decedent" means an individual who was not domiciled in Indiana at the time of his death• IC § 6-4.1-1-7

• "Nonresident decedent" means an individual who was not domiciled in Indiana on the date of the individual's death• 45 IAC 4.1-1-12

Residency – Close Calls

• Estate can call the Department for a recommendation

• Estate may Petition the court to Determine Domicile• In county where Indiana real estate is located

NONRESIDENT Inheritance Tax

• Indiana Inheritance Tax Return for Non-Resident Decedent

• Form IH-12

• www.in.gov/dor/3509.htm

• Filed with Department• Paid to Department

http://www.in.gov/dor/3509.htm

Joint Ownership with Rights of Survivorship

(Page 72 of LYB)


Joint Ownership/Contribution

Tenancy in Common

• “undivided one-half” (one-third, four-fifths)

• Transfers pursuant to will/trust

With Rights of Survivorship

• “with rights of survivorship”

• Automatically transfers entire property to surviving joint owner


IC § 32-17-11-17

• “Unless there is clear and convincing evidence of a different intent, during the lifetime of all parties, a joint account belongs to the parties in proportion to the net contributions by each party to the sums on deposit.”

• Putting a joint owner on an account does NOT automatically gift any portion of that account.


IC § 6-4.1-2-5

• If property is held by two (2) or more individuals jointly with rights of survivorship, the exercise of the rights of the surviving joint owner or owners to the immediate ownership or possession and enjoyment of the property upon the death of one (1) of the joint owners is a transfer to which the inheritance tax applies. . .


Joint Ownership =

Transfer from deceased joint owner to surviving joint owner on the date of death


IC § 6-4.1-2-5

• The value of the property so transferred equals the remainder of (1) the total value of the jointly held property, minus (2) the value of that portion of the jointly held property which the surviving joint owner or owners prove belonged to him or them


Value of the Transfer for IH tax purposes

=Total Value -

Value of surviving owner(s) proven contribution(s)


• Proving Contributions:

• Inheritance from a third party

• Contribution to purchase price (% or amount)

• Amount of deposits to joint bank account

• Income tax statements showing payment of taxes on income (or a portion of income) from the joint asset

• Provide documentation


45 IAC 4.1-2-9(c)

• If it is shown that a joint bank account was established for the convenience of the decedent and that the rights of survivorship were not intended, the joint bank account shall pass pursuant to will or the laws of intestate succession.

• Usually shown by affidavit of the surviving joint owner(s)

Gifts in Contemplation of Death(Page 73 of LYB)


Gifts in Contemplation

IC § 6-4.1-2-4(b)

• A transfer is presumed to have been made in contemplation of the transferor’s death if it is made within one (1) year before the transferor’s date of death. However, the presumption is rebuttable.

• NOT death bed gifts – “Gifts Causa Mortis”


45 IAC 4.1-2-6(e)

• To determine whether a transfer was made in contemplation of death, all relevant circumstances, including the following, will be taken into consideration:


1. The mental and physical condition of the transferor, including the cause of death and whether that condition was known to the transferor on the date of the transfer

2. The age of the transferor

3. The length of time between the transfer and death


4. The existence of a pattern of making gifts

5. The portion of the transferor’s estate transferred

6. Whether the property interest was transferred to a transferee who would have otherwise received the property on the transferor’s death


• Practitioners should place values of “gifts in contemplation” on Schedule E and indicate to whom the gift was transferred

• The gifts should be distributed to the appropriate transferees on the Computation Page and calculate the tax

Education Savings Plans – 529 Plans

(Page 75 of LYB)


529 Plans

• Ind. Code 21-9-7-3• Section 529 of the Internal Revenue Code• Education savings program created by the

Indiana Education Savings Authority• “Indiana College Choice” 529 Plan – exempt

from Indiana Inheritance Tax if owned by an Indiana resident decedent – Ind. Code 21-9-2-2

• Non “Indiana College Choice 529 Plan” is not exempt from Indiana Inheritance Tax

Valuation of Business Interests(Page 76 of LYB)


Business Valuations

• IC § 6-4.1-4-1(a)(2)• (a) . . . The return shall:

• (2) Indicate the fair market value, as of the appraisal date prescribed by 6-4.1-5-1.5, of each property interest included in the statement . . .

• 6-4.1-5-1.5 states that the appraisal date is generally the date of death

Business Valuations

• 45 IAC 4.1-5-1 “Fair market value” defined

• “means the price at which a willing buyer and a willing seller would arrive, after negotiation for a sale, where neither is acting under compulsion and both have a reasonable knowledge of all the facts affecting value.”

• But not where “the parties exchanging the property are not dealing at arm’s length.”

Business Valuations

• Arms Length Dealing – means independent parties looking out for their own interests

• Related parties (i.e. a transferee, heir, relative of the decedent, or a relative of the personal representative or trustee) do not deal at “arms length”

• DOR not bound by Buy-Sell Agreement

Business Valuations

• 45 IAC 4.1-5-4 Closely held corporations, partnership interests, and unincorporated businesses

• “Unless there is a sale in part or in total during the administration of the estate, the fair market value of a closely held corporation, a partnership interest, or an unincorporated business shall be determined by calculating the operational worth of the business.”

Business Valuations

• 45 IAC 4.1-5-4 con’t

• (b) The preferred method . . . Is the capitalization of earnings method.

• (c) If it is not reasonable to use the capitalization of earnings method, then any other method that is reasonable may be used to establish the operational worth of the business. . . .

Business Valuations

• 45 IAC 4.1-5-4(c) con’t: The department will look at the following factors:

• The nature of the business

• The economic outlook and condition of the industry.

• The earning capacity of the business

• The fair market value of the assets of the business, including good will

• Proceeds from an insurance policy on the life of the decedent payable to a business . . . shall be included in the operational worth.

Beyond the IH-6…

Business Valuations

• The Department prefers valuations completed by accredited business valuators. • Why? Guarantees:

• Certain valuation standards have been met• All assets have been included (including

goodwill)• Discounts have been properly explained and

justified• A solid valuation has been reached and justified

Business Valuations

• If the Estate has not provided a business appraisal done by an accredited business valuator, DOR will ask for the information required by the regulation

• Ask you to show your work

• Include all assets of the business

• Justify discounts, if any are taken

• Do NOT provide only book value

• Provide documentation for all valuation conclusions

• Provide documentation of ownership

Valuation of Real Estate(Page 76 of LYB)


Determining FMV of Real Estate


Appraisals:

Residential – accept market analysis by real estate broker with comparables

Commercial – licensed appraiser preferred

Farm land – licensed appraiser preferred

Determining FMV of Real Estate

• Sale of Real Estate within 18 months of date of death

• List GROSS purchase price

• Expenses actually incurred in selling property should be listed on Schedule F

• HUD-1 Statement attached to support sale and value


Step Grandchildren(Page 80 of LYB)


Step Grandchildren – A or C?

Discovery of Additional Assets(Page 87 of LYB)


Discovery of Additional Assets

• IH-6 Filed and within 120 days of original Order Determining Inheritance Tax Due

1) May file an amended return and Order with county since Court still has jurisdiction (See Broyles, 457 N.E.2d 250 and Ind. Code § 6-4.1-7-1) or

2) Send letter with revised IH-6 directly to Department and pay additional tax to County Treasurer


Discovery of Additional Assets (Cont.)

• IH-6 Filed and after 120 days of original Order Determining Inheritance Tax Due

• Letter with revised IH-6 sent directly to Department and additional tax paid to County Treasurer

It is always appreciated and preferred if the estate provides a revised IH-6 with the computation page and the schedules with changes reflecting the new values


Refunds of IH Tax(Page 88 of LYB)


How to Claim a Refund

• Prepare and submit a Claim for a Refund (Form IH-5) with the IH Tax Section of DOR

• Less preferred – letter• Necessary - identify estate – amount of refund

requested – reason(s) for refund – supporting documentation

• Extremely helpful – provide revised IH-6 and computation page

Statute of Limitations for Claiming a Refund

Ind. Code 6-4.1-10-1

A Claim for a Refund must be filed with the IH Tax Section of DOR within the latter of:• 3 years from the date the tax was paid or• 1 year from the date the tax is finally

determined

Refund Process

1) File Claim for Refund with IH Tax Section

2) IH Tax Section will issue Order either approving refund, partially approving refund or denying refund to the estate’s representative

3) IH Tax Section will issue Vouchers to the estate’s representative to approve and return to IH Tax Section

4) State Auditor issues Refund Check

Time Frames on Refunds/Denials

• Once IH Tax Section has issued Order approving a claim for a refund the refund check should be issued within 30 days (assumes vouchers are promptly returned by the estate’s representative)

• Refund denial – estate has 90 days from the date of the IH Tax Section’s Order to file appeal with the probate court

Taxation of Trust Distributions(Pages 89 - 92 of LYB)


Charities as Remaindermen?

• Chart and its examples are not applicable• Be very careful in drafting trusts that include

charities as remaindermen

1)Amount going to the charity has to be presently ascertainable or severable from the non-charitable portion of the trust; and

2)The remote contingent distribution to the charity should take the form required by federal laws and regulations – e.g. CRUT, CRAT, CLAT (Tax Reform Act of 1969) – Indiana not as restrictive


Charities as Remaindermen?

• Ind. Code 6-4.1-3-1:

“Each transfer described in section 2055(a) of the IRC is exempt from inheritance tax.”

• 45 Ind. Admin. Code 4.13-1(b):

“A transferee claiming the exemption provided by subsection a (charitable exemption) has the burden of proof, and any ambiguity will be strictly enforced against the transferee.”


Mandatory Income Trusts –Charities as Remaindermen?

• Acceptable to the Department if:

1)Income beneficiary has mandatory right to income and

2)The Trustee does not have any authority to invade the Trust principal for the benefit of any beneficiary

Tax Treatment – Life Estate value taxed to income beneficiary, remainder to charity


Discretionary Trusts –Charities as Remaindermen?

• Not acceptable to the Department because the amount going to the charity is not presently ascertainable or severable from the non-charitable portion of the trust


Trust Drafting Suggestions –Charities as Remaindermen

1)Income beneficiary has mandatory right to income and the Trustee does not have any authority to invade the Trust principal for the benefit of any beneficiary

2)Utilize “qualified charitable remainder trusts” • CRUT – Charitable Remainder Unitrust• CRAT – Charitable Remainder Annuity Trust• CLAT – Charitable Lead Annuity Trust


Documents

Indiana Department of Revenue Inheritance Tax Section Indianapolis Bar Association Estate Planning and Administration Section March 28, 2012 Don Hopper,