Iowa Estate Planning – Tax Planning

There is no actual “death tax” in the United States.  In Iowa, there are two taxes that may apply as a result of your death.  Just like income taxes, one is a tax under the Iowa state government (Iowa inheritance tax) and the other is a tax under the federal government (federal estate tax).  In addition to “death taxes” there is also the issue of income taxes and gift taxes, which can play a role in tax liability at one’s death.

Iowa Inheritance tax
The state of Iowa has a “death tax” that is a tax based upon what someone inherits from a deceased individual.  Under current law, there is a 100% exemption for inheritances by a spouse, charities, and lineal descendants and ascendants (children, grandchildren, parents, grandparents, etc.)  Thus, any amounts that would pass to these exempt individuals or charities is free from any tax.  Any other individual receiving an inheritance (siblings, nephew, friend, etc.) will be taxed on their inheritance which will be based upon the amount they receive and the relationship to the decedent.  This tax would apply to any asset transferring as a result of a death, such as a named beneficiary, an IRA, or any other type of asset, except life insurance to a named individual.

Federal Estate tax
For 2011-12, the Federal Estate Tax only applies to estates greater than $5 million.  Currently, beginning for deaths after December 31, 2012, the federal estate tax exemption amount will be reduced to $1 million.  Under the federal estate tax system, any amounts that pass to the surviving spouse or to charities are fully exempt from federal estate taxation.  For any other amounts, each person has an available exemption that can be used to pass amounts tax-free up to that exemption amount.