Does Iowa Have an Estate Tax?

Often, people worry that when they pass their estate to their inheritors, the inheritors will be saddled with significant estate taxes, both federal and state. While there is a federal estate tax, Iowa doesn’t levy estate taxes in the state.

However, there is currently a state inheritance tax. This is a tax based on the value of their inheritance. It differs from an estate tax in that the estate tax is paid out of the estate itself, while the inheritors pay the inheritance tax.

The inheritance tax doesn’t apply to several family members:

  • Parents
  • Grandparents
  • Great-grandparents
  • Children
  • Stepchildren
  • Grandchildren
  • Great-grandchildren
  • Any other lineal relative

The inheritance tax applies to what’s considered nonlinear relatives, including:

  • Siblings or half-siblings
  • Children-in-law
  • Aunts or uncles
  • Nieces or nephews
  • Brothers- or sisters-in-law
  • Foster children
  • Cousins

The tax rate varies between 5% to 15% of the value of the inheritance. But that will soon change. Iowa is expected to repeal the inheritance tax in 2025.

What Is the Federal Estate Tax?

The federal estate tax must be paid out of the estate itself, which can lower the value of the estate. The tax rate varies anywhere from 18% to 40%, depending on several factors, which can clearly cause a significant reduction in the estate by the time it’s distributed to the beneficiaries.

There is a threshold in value that the estate needs to exceed before the estate tax becomes applicable. That threshold changes annually. In 2024, an estate can be worth up to $13.61 million and not have to pay estate taxes. The taxes would apply to any amount over that. So, if the estate is worth $15 million, the taxable portion would be $1.39 million.

What Options Exist for Protecting Assets from the Federal Estate Tax or the Iowa Inheritance Tax?

When there’s a potential of having anywhere from 5% to 40% of the estate lost to taxes, it’s not surprising that people want to know what they can do to protect their assets. There are multiple ways to do this, and a popular one for many reasons is creating a living trust (also known as an inter vivos trust).

A living trust is created by the estate’s owner (known as the settlor) during their lifetime. They “settle” their assets into a trust, which then becomes the owner of the assets. The settlor also names the beneficiaries of the various assets, and after the settlor’s death, the assets are moved from the trust’s ownership to the beneficiaries.

While assets can be transferred through a will, the will must go through probate, which is a public process. In contrast, trusts are private and don’t go through probate.

There are two broad categories of living trusts, each with its own pros and cons.

  • Revocable living trust. As the term implies, a revocable living trust can be changed or entirely revoked during the settlor’s lifetime. That gives the settlor more control in case unforeseen circumstances arise, such as a falling out with a beneficiary.
  • Irrevocable living trust. This type of trust can’t be changed or revoked except in rare cases and with the beneficiary’s permission.

Besides the matter of control of the trust, there’s another significant difference between revocable and irrevocable living trusts: The irrevocable living trust is more likely to help avoid estate taxes. Assets placed in an irrevocable living trust are considered to have been removed from the estate and, as such, are no longer subject to estate taxes. Assets in a revocable living trust that can still be controlled by the settlor may still be considered part of the estate. The revocable living trust will allow them to avoid probate but possibly not avoid estate taxes.

This can be a complicated situation. Giving up control of the assets for an irrevocable trust means the settlor would want to be quite certain nothing major will change in the foreseeable future. That’s why it’s crucial to work with an experienced estate planning attorney when considering setting up a trust because estate taxes are a concern. A knowledge trust attorney can help you determine if an irrevocable trust is in your best interests and what type of trust would best represent your estate.

Another positive aspect of irrevocable living trusts is that they can’t be accessed by creditors or lawsuits in most cases. This makes them especially valuable to people in professions that are subject to lawsuits, such as medical professionals.

Is There Anything a Trust Can’t Do?

There’s one important thing a trust can’t do, and that’s name a guardian to minor children. If both parents die while the children are under 18 and the parents didn’t draw up a will establishing a guardian, the court will handle that. Most people have strong preferences for who should or shouldn’t be their children’s guardian. The only way to guarantee their wishes are met is to have a legal will drawn up.

What Should I Do if I Want to Learn More About How a Trust Could Protect My Assets?

Call Scott Shoemaker & Associates at 319-379-2007 for an initial case evaluation. Every estate is unique. We can examine the specifics of your estate to learn what it contains and what might be the best approach to protecting your assets. Our team of experienced, knowledgeable estate planning attorneys understands what’s at stake and why it’s vital to you to protect those assets for future generations. We’ll strive to develop a plan for the best possible outcomes.