Erin Grabe

Apr 29 2015

The Three Taxes (Part 3 of 4)


Getting Started with Estate Planning
This is the 3rd in a 4-part series on Estate Planning.

A large portion of Estate planning involves taking steps to minimize the impact of taxes on the Estate. For Iowa residents, there are three main taxes that can come into play at the time of death: Income Tax, Federal Estate Tax, and Inheritance Tax.

Income Tax.

Even at death, an individual’s final Income Tax returns must be filed. Additionally, the Estate itself must file one or more Fiduciary Income Tax returns for the period of time the Estate is open.

Deferred Income. Though pre-tax retirement accounts typically pass by beneficiary designation, as opposed to passing through the Estate, they are often one of an individual’s largest assets. There are certain rules about how these types of accounts must be paid out. Because there is deferred income, the beneficiary of the account will have to pay Income Tax at their own tax bracket as they receive the funds. There are also required minimum distributions for certain beneficiaries.

A qualified charity is not subject to Income Tax. For individuals with charitable intentions, it may be worth visiting with your Estate Planning Attorney given the benefit of naming a charity as the beneficiary of assets such as IRAs or annuities that have deferred Income Tax associated with them.

Federal Estate Tax.

Federal Estate Tax is a tax on your right to transfer property at your death. Following the death of an individual, the decedent’s property must be valued and the applicability of any of the Federal Estate Taxes determined based on the value of the gross Estate. The gross Estate is reduced by certain deductions in determining the amount of the Estate subject to Federal Estate Tax.

The most important deduction available to a married couple is the marital deduction. A deduction is allowed for the value of all property passing to a surviving spouse or a qualified Trust for the benefit of the surviving spouse. In 2013, Congress codified the Federal Estate Tax exemption at $5 million, subject to inflation. As a result, most households do not have to worry about Federal Estate Tax.

Iowa Inheritance Tax.

The state of Iowa does not have an “Estate Tax,” but it does have an Inheritance Tax. Iowa Inheritance Tax is based upon who receives the property of the Estate. When left to a surviving spouse, lineal decedents (e.g. children, grandchildren, etc.), or qualified charities there is no Iowa Inheritance Tax. However, if left to anyone else including non-lineal decedents such as siblings, nieces/nephews or non-family members, Iowa Inheritance Tax may apply. The tax rate ranges from 5% – 15%.

The chart below illustrates relationships subject to Iowa Inheritance Tax:

Based on Iowa Code as of December 2014.

Based on Iowa Code as of December 2014.

Please visit our blog, HillsHelps.com, next Wednesday for the final part of our 4-part series on Estate Planning.

This post is for information purposes only and should not be interpreted as providing legal advice. You should consult an Estate Planning Attorney before executing any legal documents. Investment products are not a deposit, not FDIC insured, not insured by any government agency, carry no bank guarantee, and may go down in value.

View the complete 4-Part Estate Planning Series:

Erin Grabe

About Erin Grabe

Erin Grabe is a Trust Officer at Hills Bank’s North Liberty Location on Forevergreen Road. She serves customers in the areas of estate planning, estate administration, and personal trust administration. Erin earned her undergraduate degree at the University of Kansas and is a graduate of the University of Iowa College of Law. Erin can be reached at erin_grabe@hillsbank.com.


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