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Iowa Governor Terry Branstad signed legislation repealing the Iowa estate tax and generation skipping transfer (“GST”) tax on April 3, 2014.  While this sounds like a huge change in state estate taxes, the Iowa estate and GST taxes have equaled zero since 2005.

In Iowa, the estate and GST taxes were called a “sponge tax.” The sponge tax was dependent on the federal estate tax credit.  In January 2005, the federal law changed from a credit to a deduction.  Since the Iowa estate and GST taxes were equal to the maximum federal credit allowable for state estate and GST taxes paid, and there was no longer a federal credit, the Iowa estate and GST taxes became zero. This legislation repealing the Iowa estate and GST taxes simply removes obsolete language from the Iowa Code.

What did not change was Iowa’s inheritance tax.  Iowa is one of a handful of states that requires an inheritance tax be paid by the beneficiaries of an estate.  The estate tax is paid by the decedent’s assets, but an inheritance tax is shouldered by the beneficiary.  In Iowa, there are exemptions, such as the surviving spouse, lineal ancestors (parents and grandparents), lineal descendants (children, grandchildren and stepchildren), and domestic charities.  However, the inheritance tax is still required for those estates with assets more than $25,000 that leave the property to other people or entities.

Recipient Tax
Brother, sister, Son-in-law, Daughter-in-law 5-10%
Aunt, Uncle, Niece, Nephew, Brother-in-law, Sister-in-law, other individuals 10-15%  
For-profit corporate entity 15%
Foreign non-profit 10%

Therefore, a niece or nephew, an employee, or a neighbor that receives a special bequest will incur taxes on the bequest between 10% and 15%, depending on the amount of the bequest.  

Because Iowa still has an inheritance tax in place, it is important that proper planning is done to minimize the effects of such tax.  For example, instead of leaving something to a sister and brother-in-law, an individual should leave the asset solely to the sister, where the tax is approximately 5% lower.