What was the previous system?
Iowa had a system that charged an inheritance tax. An inheritance tax is a tax charged to beneficiaries for the right of receiving assets. Iowa’s inheritance tax was imposed on anyone who was going to receive assets, either through a will or other will substitute, or through intestacy (the term for divvying assets up of a decedent who did not have a will or other testamentary instrument). For an heir to receive assets tax-free, they had to be directly lineally related to the decedent, such as a child or step-child, a surviving spouse, or a parent or grandparent of the decedent. Anyone else, including siblings, cousins, or friends paid a tax on the inherited assets. Some assets could be excluded from the tax, such as life insurance proceeds paid to a named beneficiary, but for the most part, every asset of the deceased that was passed at death was taxed, if the total of these assets was greater than $25,000, a low number for those who passed owning a home or a more expensive car. The low threshold means that the tax affected many Iowans.
For family members, depending upon the value of the estate, they would pay up to a 10% tax rate. For non-family members, that rate rose to a maximum of 15% of their inheritance.
What changes are being made?
Iowa enacted legislation in 2021 that made some significant changes regarding their inheritance tax. Those changes started to take effect January 1, 2023, and will reduce Iowa’s inheritance tax rates until the entire inheritance tax will be phased out for those who pass away after January 1, 2025. The amount of tax reduced is dependent on the year the Decedent of the estate passed away. The decreased tax rate is 20% higher each year, starting in 2021. If the Decedent died in 2021, their beneficiaries would pay 20% less tax than the original rates, if they died in 2022, it would be 40% less than the original rate, if they pass away in 2023, their beneficiaries will pay 60% less tax than the original rate, if they pass away in 2024, the beneficiaries would pay 80% less tax, and if the Decedent died in 2025 or later, the beneficiaries will not owe any Iowa inheritance tax.
Why were these changes made?
The legislature made these changes with overwhelming support from both parties in Iowa. Iowa Republicans favored the bill as a general reduction of taxes. Iowa Democrats supported the abolition of the tax because current rules limit who can receive inheritances tax free. The current rules allow lineal descendants of the deceased to pay no inheritance tax, while those of non-lineal relation pay the tax. Some LGBTQ+ Iowans may have wished to leave property to someone other than their spouse, parent, or child. Another factor that garnered support for the bill was the economic impact on middle class Iowans – 92.5% of those paying the tax were making less than $80,000.
What will this mean?
The repeal of the Iowa inheritance tax will create huge changes to how estate planning instruments are used in Iowa, and how people who own property in Iowa can plan on passing on their property. For people who had drafted documents prior to this big change, this may mean an opportunity to revisit those documents to see if any changes need to be made to planned distributions to family or friends, or to change expected distributions made to cover the previously-existing inheritance tax. Our Estate Planning team at Hightower Reff Law is highly experienced and able to help you make the most of your estate planning in light of these changes.
Estate planning is more than just assets. And it is more than just passing wealth. Estate planning is about family and making sure you are taken care of, no matter your stage in life.
This article should not be construed as legal advice. Situations are unique from one another and it is impossible to provide legal advice for every situation without knowing the individual facts.
If you would like to talk more about estate planning, contact Hightower Reff Law today.
1 Iowa Code 450.10
2 Gruber-Miller, S. (2021, March 17). Iowa senate unanimously passes bill eliminating inheritance tax, phasing income tax cuts in sooner. Des Moines Register.