Iowa Inheritance Tax

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch Women

Iowa Inheritance Tax• Eliminated in 1996 for children, grandchildren,

parents and grandparents

• Starts at $0 per recipients for non-lineal decedents with a range from 5% to 10% above $150,000 of taxable income


Administration (Iowa)• Executor/trix may receive $220 plus 2% of the

value of the estate over $5,000.

• Attorney is the same, but often money can be saved by hiring the attorney by the hour.

• Bonding may be required.


Liquidity• a). Cash• b). Life Insurance• c). 15 year installment payments if qualified• d). Borrowing


Unified Credit• The estate tax due on $3,500,000 in 2009 was

$1,455,800

• However, no tax is due if you still have your unified credit

• The excess is taxed at 45%


Federal Estate Tax Credit

• Ramp-up in the applicable exclusion– $675,000 in 2001– $1,000,000 in 2002-2003– $1,500,000 in 2004-2005– $2,000,000 in 2006-2008– $3,500,000 in 2009– Estate tax repealed in 2010

• No basis step-up (with exceptions)– $1,000,000 in 2011 and thereafter

Old Rules


2010 Rules• No tax, but no step up in basis?

• Can “adopt” the 2011 rules and get “step up in basis” so would be useful for $5/$10 million dollar estates.


New rulesHusband and wives can share the $10 million (Portability) orhave $5 million of “generation skipping” each (Reunification) or have $5 million of “gifting” each

In 2013 it is scheduled to go back to the old $1 million rules with 41% to 60% rates on excess


ESTATE SETTLEMENTWithout a life estate / trust

Husband's death Wife's deathGross Estate $3,580,000 $3,590,000Inheritance $3,500,000Life Insurance benefits no ownership $ 100,000Total gross estate $3,580,000 $7,190,000DeductionsDebts $ 0 $ 0Admin.(estimated) $70,000 $140,000Funeral Expenses $ 7,000 $ 7,000Charitable deducts. $ 3,000 $ 3,000Total Expenses $80,000 $150,000

To Spouse To Children (b.t.)Adjust. Gross Estate $3,500,000 $ 7,040,000Marital Deduction $3,500,000 $ 0Taxable Estate - Fed. $ 0 $7,040,000Gross Federal Tax $ 0 $3,048,800Unified Tax Credit $1,455,800 $ 1,455,800State Tax Credit $0 $ 0Net Federal Tax $0 $ 1,593,000State Death Tax $0 $ ???Total Costs $80,000 $1,743,000Combined $1,823,000

Old Rules

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch WomenESTATE SETTLEMENTWith a life estate / trust

Husband's death Wife's deathGross Estate $3,580,000 $3,580,000Inheritance $ 0Life Insurance benefits no ownership $ 0 paid to trustTotal gross estate $3,580,000 $3,580,000DeductionsDebts $0 $0Admin.(estimated) $10,000 $10,000Funeral Expenses $7,000 $ 7,000Charitable deducts. $63,000 $63,000Total Expenses $80,000 $80,000

To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000Marital Deduction $ 0 $ 0Taxable Estate - Fed. $3,500,000 $3,500,000Gross Federal Tax $1,455,800 $1,455,800Unified Tax Credit $ 1,455,800 $ 1,455,800State Tax Credit $ 0 $ 0Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ????Total Costs $10,000 $10,000Combined $20,000

Old Rules

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch WomenESTATE SETTLEMENT under 2010 rulesWith a life estate / trust


To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000Marital Deduction $ 0 $ 0Taxable Estate - Fed. $ 0 $ 0Gross Federal Tax $ 0 $ 0Unified Tax Credit $ 0 $ 0State Tax Credit $ 0 $ 0Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ????Total Costs $10,000 $10,000Combined $20,000

2010 Rules

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch WomenESTATE SETTLEMENT under 2011 rulesWith a life estate / trust


To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000Marital Deduction $ 0 $ 0Taxable Estate - Fed. $ 0 $ 0Gross Federal Tax $ 0 $ 0Unified Tax Credit $ 0 $ 0State Tax Credit $ 0 $ 0Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ????Total Costs $10,000 $10,000Combined $20,000

2011 Rules

Or to Spouse

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch WomenESTATE SETTLEMENTWith a life estate / trust Under 2013 rules ????????

Husband's death Wife's deathGross Estate $3,580,000 $ 3,580,000Inheritance $ 2,500,000Life Insurance benefits no ownership $ 0 paid to trustTotal gross estate $3,580,000 $6,080,000DeductionsDebts $0 $0Admin.(estimated) $10,000 $10,000Funeral Expenses $7,000 $ 7,000Charitable deducts. $63,000 $63,000Total Expenses $80,000 $80,000

To Trust ($1 mil. children, $2.5 mil wife) To Children Adjust. Gross Estate $3,500,000 $6,000,000Marital Deduction $ 2,500,000 $ 0Taxable Estate - Fed. $1,000,000 $6,000,000Gross Federal Tax $ 345,800 $ 2,700,800Unified Tax Credit $ 345,800 $ 345,800State Tax Credit $ 0 $ 0Net Federal Tax $ 0 $ 2,355,000 ???

State Death Tax $ 0 $ ????Total Costs $10,000 $ 2,355,800 ???Combined $2,365,800

2013 Rules?


TrustsProperty Corpus - The assets that are held in trust (also called trust res, trust assets, principal, or trust estate)

Trustee Holds title to trust property; manages the trust property

Beneficiary Person or institution for whose benefit trustee owns and manages the trust property

Document also called Trust instrumentDocument that embodies the terms of the trust

Donor Settlor/Grantor person who funds the trust


Advantages of Trusts• Can separate assets from beneficiaries; i.e. separate

management from benefits• Utilize professional manage of investments• Avoid probate or minimize probate costs• Provide for guardianship requirements of transfers to

minors or incapacitated persons• Increase privacy in property transfers • Guard against will contests• Save estate tax, in certain cases


Basic Trusts• Trust may be

– Intervivos (Living trust) – established during life• Revocable - can be changed• Irrevocable – cannot be changed

– Testamentary – established at time of death, pour-over trusts are established by a will

• Trust may be joint (one trust for both spouses) or separate

• All trusts become irrevocable upon the death of the settlor


Types of TrustsLiving Trusts

Irrevocable Living TrustsRevocable Living Trusts

Testamentary Trusts

Charitable Remainder TrustsLife Insurance TrustsGeneration Skipping Trust


Inter Vivos Revocable Trust“Living Trusts”

• Avoids probate of trust assets– Assets not required to go through probate process so transfer may be quicker

after death– Generally costs more to create than a will, but avoids probate costs– Commonly used to avoid probate in another state where property is held

• Property remains part of taxable estate for calculation federal estate tax– Does not reduce the value of estate for estate tax planning– Heirs do receive step-up in basis because of retained control– Spouses can use their own individual unified credit

• Can be fully funded at creation, at a set later date or subject to pour-over provisions of will

• Can be used to transfer management of assets – can involve successor trustees to mange assets before death


Inter Vivos Irrevocable Trust• Can reduce value of taxable estate – common tool for very high

value estates

• If grantor/settlor does not retain interest in income or corpus of trust

• Trust must benefit others – Ex. personal charitable foundation• No retention of life estate in income• Enjoyment by beneficiaries cannot be contingent on death of settlor –

must be present interest (some room to plan for minors)• Irrivocable transfer of property

• Transfers subject to Gift Tax: over $13,000 (2012) per person reduces unified credit but appreciation occurs outside of estate


Long term care insurance• Your odds are 33% that you will spend more than 3

months in a nursing home (according to the insurance industry)

• The very wealthy and very poor probably don’t need LTC insurance

• AARP suggests those with assets of more than $75,000 but less than $1 million may want to consider LTC in the Midwest


Providing for Long-Term Care• Adequate cash flow

– Significant earnings– Sell asset

• Long-Term Care Insurance

• Medicaid – Restrictions on resources


Charitable Remainder Uni-Trust CRUT• Transfer property into trust irrevocably• Trust pays settlor income for life or term of years

– May provide for successive income beneficiaries • Remainder of trust goes to charities after death of

settlor/successor beneficiary or after term of years• May transfer appreciated property into CRT without

capital gain recognition– CRT may sell appreciated property without recognizing

capital gain• May receive charitable deduction • Payments may go to “Crummey Trust” to buy life

insurance


Charitable Remainder Annuity Trust CRAT• Transfer property into trust irrevocably• Trust pays settlor income for life or term of years

– Relatively high rates of return on the full amount – no recognition of capital gains

• Remainder of trust goes to charities after death of settlor/successor beneficiary or after term of years

• May receive charitable deduction • Payments may go to “Crummey Trust” to buy life

insurance


Up to date estate planDocuments

– Will– DPA

Property titled correctly– TOD/POD

Plans for non-titled propertyBeneficiaries current – people tend to name and forget


Questions• Who do you want to get into your safety

deposit box? Is their name on card?• Does your will/trust provide for designating

personal items? Grandma’s Yellow Pie Plate• Where is your most recent will located?• Who needs to know your plan? Why?• Have you compiled all critical information in

one place? Who knows where?


Interest Accumulation(Investments)

Premiums $$$$

MortalityAdm. Costs

Universal Life Insuranceor

Variable Life


Advance Directives• Durable power of attorney A grant of authority to make financial decisions

and conduct business on your behalf if you become incapacitated• Durable power of attorney for health care

A grant of authority to make health care decisions on your behalf if you are unable to make such

decisions.


Durable Power of Attorney• Grant of power to another to look after assets and manage

affairs• Anticipates possibility of incompetence; avoids need for

incompetency hearing or approval of guardian• Statute defines powers (plenary – complete, unqualified)

– Should also include express powers for tax returns, life insurance matters, making gifts, transferring property into trust, accessing safe deposit box, dealing with retirement plans and Social Security

• May be contingent or present– Contingent – effective only upon incompetence– Present – effective when executed and continues in spite of

incompetence


Durable power of attorney for health care Choose a person (agent) to make health care decisions for you if you cannot speak for yourself

Communicate instructions about your health care Your responsibilities

Think about your values and wishesChoose someone you trustChoose an alternate agentTalk to family members and the agent concerning your wishesComplete, sign and make copies for the agent and family members

Agent responsibilities

Allows you to:

Understand your wishesEvaluate choices about your heath careMake decisions in accordance with your wishesKeep the original document


Doctor’s responsibility

Allows you to:

Living willbecomes effective when death is the alternative to treatment and you are unable to make that decision

Direct physician to withhold or withdraw treatment that could prolong the dying process

Follow your wishes

Your responsibilitiesClarify wishes with your family and with your physicianComplete the proper formsMake copies for your family and physician


OverviewCrucial estate planning steps

– Examination of how property is owned or held– Review of family insurance program– Advisability of lifetime gifting– Alternatives for disposing during life or after death– Transferring the family business– Get started– Get it written

Managing for Today and TomorrowBusiness, Succession, Retirement and Estate Planning for Farm and Ranch WomenYear Estate Tax Exemption Top Estate Tax Rate

1997 $600,000 55%1998 $625,000 55%1999 $650,000 55%2000 $675,000 55%2001 $675,000 55%2002 $1,000,000 50%2003 $1,000,000 49%2004 $1,500,000 48%2005 $1,500,000 47%2006 $2,000,000 46%2007 $2,000,000 45%2008 $2,000,000 45%2009 $3,500,000 45%

*2010 $5,000,000 or $0 35% or 0%2011 $5,000,000 35%2012 $5,000,000 35%2013 $1,000,000 55%