Indiana's inheritance tax phase-out, passed by the Indiana Legislature in 2012, will have a negligible immediate effect on small business succession planning because of the gradual, 10-year structure of the phase-out, Damian Gosheff of Faegre Baker Daniels told Greater Fort Wayne Business Weekly.
"I know what the law is now, but I don't know what it will be next year," Gosheff said, because the gradual process allows the Legislature to easily halt or reverse the phase-out if the state experiences economic or political changes. "It's caused a great deal of uncertainty," he added.
A potential increase in the federal estate tax at the end of 2012 adds to the uncertainty of tax planning. "With the federal and the Indiana taxes as they're written, there's no sense of permanence," Gosheff told the Business Weekly. Tax and estate planning now have to have some flexibility built in to make sure all the bases are covered, he said.
"Who you give your property to is very important," Gosheff said of the inheritance tax. "What we do in the estate planning process is ask the first question: Where do you want your property to go? Then I try to find a beneficial way to do that."
Tax planning is particularly important for small business owners and farmers considering succession plans, the Business Weekly reported. "Oftentimes, they may be asset-rich but cash-poor...You're going to have this bill to pay and no cash to do it, so you might have to sell off assets," Gosheff explained. Indiana heirs must pay their tax bill within a year, with a five percent discount offered if it's paid within nine months, he added.
"Often life insurance is purchased solely to provide liquidity to an estate for the payment of debt/taxes," Gosheff noted, because life insurance policies are not taxable to beneficiaries. Another tax management option is to give away assets or business control ahead of time, which is allowable and untaxed, but Gosehff says giving up that kind of control may be difficult for people.
"First and foremost, you have to know how much you will need [to live]," he told the Business Weekly. Other options include getting married, because spouses are not taxed on inheritance in Indiana, or moving to a state with no inheritance or estate taxes. Gosheff said eliminating Indiana's inheritance tax might keep more residents in the state.
"Complex issues of how a business will continue through generations is complex," Gosheff noted, "and oftentimes estate and inheritance taxes...force them to do things for tax reasons alone than for business reasons."
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