By Bruce Baker
A. The Federal Government’s Share
Current federal tax law imposes an estate tax on the value of taxable estates exceeding $5,490,000. In computing the taxable estate, federal law allows an unlimited marital deduction for qualified transfers to a spouse, as well as an unlimited deduction for bequests to qualified charitable organizations. After allowing deductions for these items and expenses associated with administration of your estate (or trust), the federal estate tax is imposed at a rate of 40% on the value of the taxable estate exceeding $5,490,000.
Recently, the President proposed a tax reform plan which included a proposal to completely eliminate the federal estate tax. With Republicans in control of the House, Senate and Presidency, many commentators believe that total repeal of the federal estate tax is likely, although much uncertainty remains. Stay tuned for further developments.
B. The Iowa Inheritance Tax
On the Iowa side, the relevant tax that can apply upon death is the Iowa inheritance tax. This tax looks at the relationship of the beneficiary to the decedent to determine whether any tax is owed. The relevant rules are as follows:
- There is no inheritance tax on property passing to a surviving spouse.
- Property passing to parents, grandparents, great-grandparents, and other lineal ascendants is also exempt from inheritance tax, as is property passing to children (biological and legally adopted children), stepchildren and their lineal descendants, grandchildren and great-grandchildren.
- Inheritance tax at graduated rates, up to 10%, is imposed on bequests to brothers, sisters (including half-brother, half-sister), sons-in-law and daughters-in-law.
- Inheritance tax at graduated rates, up to 15%, is imposed on bequests to uncles, aunts, nieces, nephews, foster children, cousins, brothers-in-law, sisters-in-law, and all other individuals.
- The first $500 of the total of all bequests for religious services are exempt from the tax.
- If all the property of the estate has a value of less than $25,000, no tax is due.
- Life insurance proceeds paid to a named beneficiary are not taxable.
- Annuities purchased under an employee pension plan or retirement plan that will be subject to federal income tax are not taxable.
- There is no inheritance tax on property passing to qualified charitable organizations.
With proper advance tax planning, your estate can be structured to eliminate or greatly reduce Uncle Sam's and Iowa’s “forced share.”