“… in this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin
One of the most common questions I am asked by my estate planning clients is how much tax will be owned at the time of death. There can be two levels of taxation at the time of death: federal tax and state tax.
First, the good news is that the federal estate tax only applies to decedents who own more than $5.45 million in assets at the time death. Thus, with the new portability rules, a husband and wife can own $10.9 million at the time of the death of the survivor and owe no federal estate tax. The bad news with the federal estate tax is that when an estate does owe tax, the tax kicks in at the rate of 40%.
Fortunately the federal estate tax does not apply to many estates. In fact, there were only 11,931 federal estate tax returns filed in 2014 with only 5,158 estates actually paying any tax. The amount of federal estate tax paid was $16,390,024,000.00 so it is not a big source of revenue for the federal government. I found it interesting that Iowa has the fifth highest number of federal estate tax returns filed per capita of all the states, presumably in part due to the dramatic rise in the value of farmland in recent years.
There is also good news when it comes to death taxes in most states. Iowa, for example, has an inheritance tax on the assets received from a decedent; however, there are many exemptions from the tax. For example, there is no tax on amounts received by spouses and lineal descendants, e.g. children and grandchildren, or amounts received by lineal ascendants, e.g. parents, grandparents. Step-children and step-grandchildren are included in this exemption. There is also an exemption for amounts given to charities.
There is, however, Iowa inheritance tax on assets received by more distant relatives. For example, there is inheritance tax on amounts received by a sibling or a son-in-law or daughter-in-law. The maximum marginal tax rate for these persons is 10%. For all other persons, the maximum marginal rate of inheritance tax is 15%.
Nebraska also has an inheritance tax on amounts received from decedents and this tax is actually paid to the counties in which the decedent owned property. The bad news with this tax is that the only exemption is for property passing to a surviving spouse. The good news with this tax is that the rates are very low for the most common situation: assets passing to children. For example, the tax rate on assets passing to children is only 1%. Nieces and nephews and aunts and uncles are taxed at 13% and all others the tax rate is 18%.
If you are lucky enough to be a resident of South Dakota, you can rest easy. There is no death tax of any type in South Dakota.
So while death is still a certainty, death taxes are not.
This is a simplified summary of the death taxes that can come into play on both the federal and state level. Planning to avoid or minimize these taxes can be very complicated as is the preparation of these tax returns when required. If you have any questions concerning these taxes or estate planning in general please feel free to call a member of our estate planning group: Karrie Hruska and Robert Meis.0