Iowa Estate Plan

 If you were luck to live until January 1, 2025, and you were worried about your beneficiaries having to pay Iowa inheritance tax when your estate is passed on to them, your worries are now over. The Iowa inheritance tax is fully repealed as of today! However, as a couple of remainders: If you died in 2024, you probably wouldn't be reading this anyway. But if you could, there would only be Iowa inheritance tax owed if your property passed to someone other than a charity, your spouse, or lineal descendant or ascendant. Thus, small category of coverage. Second reminder, we are still subject to the federal estate tax. Well, 99.99% are not as the exemption amount for 2025 is now $13,990,000. If your estate is below that figure, no worries.

Almost exactly 2 years ago, I blogged on the updated federal estate taxes for 2011 and 2012 and noted that the rules put in place then were just punted down the road.  That "punt" finally landed when the "Fiscal Cliff" doomsday of 1-1-13 approached. Finally , today we received some updated rules on the federal estate tax system for 2013 and beyond.  (Can I say "permanent"?).  I'll update more on the details of the statute after it is digested, but essentially most of the rules from 2012 will remain in place.  (Slightly more than $5 million exemption per person and continued portability options for spouses.) The Iowa Academy of Trust and Estate Counsel have a quick summary of the tax bill here . I expected this to happen, but I'm often wrong when it comes to predicting what Congress will do.  At least we have a better set of rules to work with and estate planners will know what to tell clients for the future.

Apparently Congress was following my posts and decided to wait until the last minute to make changes to the federal estate tax system. Three significant changes to be aware of from the TRA 2010: Exemption Amount Change - While $1 million was scheduled for the exemption amount for 2011 the new act implements a $5 million exemption per person. Thus, a married couple could pass on $10 million without worrying about federal estate taxes. With these type of numbers, there will be very few estates that will have any federal estate liability. In addition, for those individuals that passed in 2010, their estate can choose either the old 2010 "no estate tax - carryover basis" rules or the new "$5 million exemption - stepped-up basis". Portability - In somewhat of a surprise, one of the bigger changes was the addition of the idea of portability. The idea is essentially if your spouse doesn't "utilize" their exemption amount, the surviving spouse can take ...

With plenty of time left in 2010 (insert sarcasm tone), Congress is moving towards modifying the federal estate tax system. Here is a quick summary of where we are currently, where will be if they don't pass anything, and what the current bill (" Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010") would provide. (Disclaimer: this is the quick and dirty summary for discussions at holiday parties and should not be relied upon as an extensive analysis.) What we had in 2009 - $3.5 million exemption per person, 45% tax rate What we had in 2010 - No federal estate tax. "Carryover basis" on inherited assets, with limits. What we will have in 2011 with no change - Federal estate tax for estates greater than $1 million, with a rate of up to 55%. Under the current proposed bill - $5 million exemption, 35% tax rate above that. One of the more interesting items in the proposed bill includes a "portability" provision. Historica...

The "Death tax" is alive and well in Iowa. Iowa currently has an inheritance tax system in place. What this means is that the person who inherits the property will determine if tax is owed or not. Compared to an estate tax system, where the size of the estate determines where tax is owed or not. (Although if the total estate is less than $25,000, there is no Iowa Inheritance tax imposed.) Iowa has an unlimited exemption from inheritance taxes for surviving spouses, charities and lineal descendants/ascendants. If the recipient fits into any of those categories, there is no Iowa inheritance tax. If the recipient is outside those categories, the tax will vary based upon the amount of the inheritance and the relationship to the decedent. The Iowa Department of Revenue's table illustrates how the tax is computed and the different tax rates applicable. If any tax is owed, it is due on the 30th day of the ninth month following the date of decedent's death.

Gifting can be an easy way to transfer your wealth to the next generation. Currently, each person is entitled to gift up to $12,000 per individual, per year, without incurring any gift tax or having to file a gift tax return. Gifts that are less than $12,000 per donee per year are typically called "annual exclusion gifts". Also, during your life, you can gift up to $1,000,000, on top of your annual exclusion gifts, to others without having to pay gift tax. However, any gifts in excess of the annual exclusion will require a gift tax return. Furthermore, dipping into the $1,000,000 "bucket" reduces the amount that you can pass at your death free from estate tax. If you would like to reduce the size of your taxable estate and see the appreciation from transferring your wealth to kids, grandkids, or others, gifts can be a great solution.

Normally if you own a life insurance policy, the death benefit proceeds are included in your taxable estate. Depending on your financial situation this may or may not create a taxable estate for you. With estate tax rates topping out at 45%, it is certainly worth considering some options to avoid having your family pay taxes on those insurance proceeds. One option is to have the insurance policy owned by an irrevocable trust (sometimes called an irrevocable life insurance trust or "ILIT"). Properly structured, you can provide a mechanism to pass those insurance proceeds to your intended beneficiaries and not included in your taxable estate. There are different rules if it is an existing policy versus whether you are purchasing a policy. However, the downside with an ILIT is that it is irrevocable...you can't change the trust. Generally speaking with estate taxes, the more control and "strings" you control over an asset the more likely it will be included in...

While a revocable trust can be changed after it is created, an irrevocable trust is a trust that cannot be changed or amended after it is created. In other words, the terms are "written in stone". A careful drafter of an irrevocable trust will be able to implement some provisions which provide for some flexibility in the future, but there are limits as to how much can change and you will lose control over the trust assets, generally speaking. So why would you create an irrevocable trust if you can't change anything? People and plans change, right? A properly drafted and operated irrevocable trust will be excluded from your taxable estate. Thus, for example, you could purchase a large life insurance policy to be owned by the trust, have the death benefits paid to the trust and then to your selected beneficiaries. While normally life insurance proceeds are included in a taxable estate, by having the irrevocable trust own the policy, those proceeds are fully excluded...