Iowa Inheritance Tax

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in 2001 • $1,000,000 in 2002-2003 • $1,500,000 in 2004-2005 • $2,000,000 in 2006-2008 • $3,500,000 in 2009 • Estate tax repealed in 2010 • No basis step-up (with exceptions) • $1,000,000 in 2011 and thereafter Old Rules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 rules Husband and wives can share the $10 million (Portability) or have $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 SETTLEMENT Without a life estate / trust Husband's death Wife's death Gross Estate $3,580,000 $3,590,000 Inheritance $3,500,000 Life Insurance benefits no ownership $ 100,000 Total gross estate $3,580,000 $7,190,000 Deductions Debts $ 0 $ 0 Admin.(estimated) $70,000 $140,000 Funeral Expenses $ 7,000 $ 7,000 Charitable deducts. $ 3,000 $ 3,000 Total Expenses $80,000 $150,000 To Spouse To Children (b.t.) Adjust. Gross Estate $3,500,000 $ 7,040,000 Marital Deduction $3,500,000 $ 0 Taxable Estate - Fed. $ 0 $7,040,000 Gross Federal Tax $ 0 $3,048,800 Unified Tax Credit $1,455,800 $ 1,455,800 State Tax Credit $0 $ 0 Net Federal Tax $0 $ 1,593,000 State Death Tax $0 $ ??? Total Costs $80,000 $1,743,000 Combined $1,823,000 Old Rules

ESTATE SETTLEMENT With a life estate / trust Husband's death Wife's death Gross Estate $3,580,000 $3,580,000 Inheritance $ 0 Life Insurance benefits no ownership $ 0 paid to trust Total gross estate $3,580,000 $3,580,000 Deductions Debts $0 $0 Admin.(estimated) $10,000 $10,000 Funeral Expenses $7,000 $ 7,000 Charitable deducts. $63,000 $63,000 Total Expenses $80,000 $80,000 To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000 Marital Deduction $ 0 $ 0 Taxable Estate - Fed. $3,500,000 $3,500,000 Gross Federal Tax $1,455,800 $1,455,800 Unified Tax Credit $ 1,455,800 $ 1,455,800 State Tax Credit $ 0 $ 0 Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ???? Total Costs $10,000 $10,000 Combined $20,000 Old Rules

ESTATE SETTLEMENT under 2010 rules With a life estate / trust Husband's death Wife's death Gross Estate $3,580,000 $3,580,000 Inheritance $ 0 Life Insurance benefits no ownership $ 0 paid to trust Total gross estate $3,580,000 $3,580,000 Deductions Debts $0 $0 Admin.(estimated) $10,000 $10,000 Funeral Expenses $7,000 $ 7,000 Charitable deducts. $63,000 $63,000 Total Expenses $80,000 $80,000 To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000 Marital Deduction $ 0 $ 0 Taxable Estate - Fed. $ 0 $ 0 Gross Federal Tax $ 0 $ 0 Unified Tax Credit $ 0 $ 0 State Tax Credit $ 0 $ 0 Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ???? Total Costs $10,000 $10,000 Combined $20,000 2010 Rules

ESTATE SETTLEMENT under 2011 rules With a life estate / trust Husband's death Wife's death Gross Estate $3,580,000 $3,580,000 Inheritance $ 0 Life Insurance benefits no ownership $ 0 paid to trust Total gross estate $3,580,000 $3,580,000 Deductions Debts $0 $0 Admin.(estimated) $10,000 $10,000 Funeral Expenses $7,000 $ 7,000 Charitable deducts. $63,000 $63,000 Total Expenses $80,000 $80,000 To Trust (children) To Children Adjust. Gross Estate $3,500,000 – spouse income $3,500,000 Marital Deduction $ 0 $ 0 Taxable Estate - Fed. $ 0 $ 0 Gross Federal Tax $ 0 $ 0 Unified Tax Credit $ 0 $ 0 State Tax Credit $ 0 $ 0 Net Federal Tax $ 0 $ 0 State Death Tax $ 0 $ ???? Total Costs $10,000 $10,000 Combined $20,000 2011 Rules Or to Spouse

ESTATE SETTLEMENT With a life estate / trust Under 2013 rules ???????? Husband's death Wife's death Gross Estate $3,580,000 $ 3,580,000 Inheritance $ 2,500,000 Life Insurance benefits no ownership $ 0 paid to trust Total gross estate $3,580,000 $6,080,000 Deductions Debts $0 $0 Admin.(estimated) $10,000 $10,000 Funeral Expenses $7,000 $ 7,000 Charitable deducts. $63,000 $63,000 Total Expenses $80,000 $80,000 To Trust ($1 mil. children, $2.5 mil wife) To Children Adjust. Gross Estate $3,500,000 $6,000,000 Marital Deduction $ 2,500,000 $ 0 Taxable Estate - Fed. $1,000,000 $6,000,000 Gross Federal Tax $ 345,800 $ 2,700,800 Unified Tax Credit $ 345,800 $ 345,800 State Tax Credit $ 0 $ 0 Net Federal Tax $ 0 $ 2,355,000 ??? State Death Tax $ 0 $ ???? Total Costs $10,000 $ 2,355,800 ??? Combined $2,365,800 2013 Rules?

Trusts Property 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 instrument Document 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 Trusts Living Trusts Irrevocable Living Trusts Revocable Living Trusts Testamentary Trusts Charitable Remainder Trusts Life Insurance Trusts Generation Skipping Trust

Inter VivosRevocable Trust“Living Trusts” • Avoids probate of trust assets • Assets not required to go through probate process so transfer may be quickerafter 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 VivosIrrevocable 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 plan Documents • Will • DPA Property titled correctly • TOD/POD Plans for non-titled property Beneficiaries 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?

Premiums $$$$ Universal Life Insurance or Variable Life Interest Accumulation (Investments) Mortality Adm. Costs

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.

DurablePower 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 Allows you to: • 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 wishes Choose someone you trust Choose an alternate agent Talk to family members and the agent concerning your wishes Complete, sign and make copies for the agent and family members Agent responsibilities Understand your wishes Evaluate choices about your heath care Make decisions in accordance with your wishes Keep the original document

Living will becomes effective when death is the alternative to treatment and you are unable to make that decision Allows you to: Direct physician to withhold or withdraw treatment that could prolong the dying process Your responsibilities Clarify wishes with your family and with your physician Complete the proper forms Make copies for your family and physician Doctor’s responsibility Follow your wishes

Overview Crucial 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

Iowa Inheritance Tax