Iowa Inheritance Tax

The inheritance tax, imposed by the State of Iowa, is a tax on property passing at death. The rules and rates for the tax are contained in Iowa Code Ch. 450.

Philosophically, the inheritance tax differs from the federal estate tax. The estate tax is imposed on the estate - the property held by the decedent at death. The estate tax is actually paid by the estate.

The inheritance tax is imposed on those who inherit the property. Thus, the amount of property each individual inherits and the degree of relationship to the decedent influence the rate of tax.

There is no marital deduction under the state inheritance tax. However, a series of varying exemptions and tax rates ease the tax burden when property is transferred within the immediate family. Also, the state inheritance tax handles insurance proceeds in a different manner.

Under the state inheritance tax, life insurance proceeds are taxed only if the proceeds are payable to the estate of the deceased insured. If the proceeds are payable to someone other than the insured, the proceeds are not subject to tax, no matter who owns the policy.

For joint tenancy property, the amount subject to Iowa inheritance tax depends upon who provided the consideration. For example, if farmland is acquired by an aunt and a niece in joint tenancy, with the aunt providing the funding, the entire amount is subject to the Iowa inheritance tax at the aunt's death. As noted below, there is no Iowa inheritance tax on property passing to a spouse and, for deaths on or after July 1, 1997, there is no Iowa inheritance tax on property passing to the decedent's lineal ascendants or lineal descendants including adopted children and stepchildren.

Property subject to the Iowa inheritance tax is the basis used to determine such costs as the executor's fee and the attorney's fee. Therefore, it is doubly important to know what property is subject to the tax.

The Iowa inheritance tax reaches most of the property held by the decedent. It includes property held in the decedent's name, that in tenancy in common to the extent of his or her portion of it, and joint tenancy and life insurance proceeds as indicated. The special use valuation concept has been extended to Iowa farmland for inheritance tax purposes provided a special use valuation election is made for federal estate tax purposes. The special use valuation method for valuing farmland is similar to the federal rules.

To determine the Iowa inheritance tax, the estate settlement costs, attorney's fee, executor's fee, debts due at death, funeral expenses, and a temporary allowance for the surviving spouse and children during estate settlement may be subtracted from the gross estate.

At this point, it is necessary to determine who is going to receive the property. The relationship between the recipient of the property and the decedent determines the tax rate. The more closely related the recipient is to the decedent, the less the tax.

Amounts passing to a husband or wife as beneficiary have not been subject to Iowa inheritance tax for several years. For deaths on or after July 1, 1997, property passing to parents, grandparents, great grandparents, and other lineal ascendants is not subject to Iowa inheritance tax. Likewise, property passing to children (including adopted children and "biological" children), stepchildren and other lineal descendants is not subject to Iowa inheritance tax.

For a brother or sister, son-in-law or daughter-in-law, there are no exemptions and the tax starts at five percent and runs up to 10 percent. For a nonrelated person, there are no exemptions and the tax ranges from 10 to 15 percent.

The Iowa inheritance tax return (Form IA 706) is due nine months after death. The federal estate tax return is due nine months after death, also.

Revised from Estate Planning, Pm-993