Iowa Residents Can Bypass Complex Inheritance Tax with Life Insurance

Iowa residents deal with a good news-bad news situation when trying to plan for the settling of their estates. The good news is there isn’t an estate tax. The bad news is that there’s a much more complicated inheritance tax that the people who receive your property must pay. To add insult to injury, the state’s revenue department audits every inheritance tax return for accuracy.

A lot of residents of Iowa run into trouble when trying to figure out what they must pay in taxes and who taxes are levied against. There are more than a few loopholes to the provision and more than a few pitfalls as well. This creates a complicated situation for your heirs unless you do some prior planning.

What You Need to Know About Iowa’s Inheritance Tax

The first thing you need to know is that inheritance tax is not the same as estate tax. When estate tax is due, it’s paid by the estate. When inheritance tax is due, it’s paid by the person who receives the property. Currently, only estates that are worth less than $25,000 are exempt from this tax.

That means that most estates are going to have to deal with this tax in one form or another. How much heirs must pay will depend on how much they receive from your estate as well as their specific relationship to you. For example, brothers, sisters, and in-laws get a lower tax rate than aunts, uncles, and businesses. The tax can range anywhere from 5% to 15% of the value of the individual inheritance.

Luckily, there are some ways to ensure that your heirs can receive their inheritance without having to deal with the heavy burden and complications of Iowa’s tax. This means leveraging life insurance to bypass the tax and possibly reduce the size of your estate.

How Life Insurance Protects Your Heirs from Inheritance Tax

In Iowa, certain things are exempt from inheritance tax. Items owned under joint tenancy or items held in a trust are considered exempt. In addition, the Iowa Department of Revenue specifically states “insurance payable to a person other than the decedent or the estate of the decedent” is exempt as well. This means life insurance policies and annuities can be used as a means of passing funds to heirs tax free.

While we highly recommend using an irrevocable life insurance trust (ILIT) for holding life insurance in Iowa, you don’t have to do this because life insurance is exempt from inheritance tax. The only thing you need to remember is to make it payable to a specific beneficiary and not your estate.

Here are some of the benefits of using life insurance in Iowa:

  • It’s an automatic exemption from inheritance tax.
  • It can be held in an irrevocable trust to maximize payouts and reduce federal estate tax.
  • You can use it to pay money out to a business in a buy-sell agreement without worrying about it impacting inheritance tax.
  • You can use life insurance to reduce the size of your estate to avoid having to deal with the complexities of Iowa’s inheritance tax return process.

These are valid reasons to use life insurance as a means of bypassing inheritance tax in Iowa. However, not all insurance policies are created equally, which is why you should work with an independent insurance provider like Howard Kaye.

How Howard Kaye Insurance Agency Can Help

At Howard Kaye, our representatives are independent insurance agents, meaning that we are permitted to sell policies from a wide range of reputable insurance companies. We have worked with top-rated insurance companies to find the best policies for our clients since 1962. In some cases, we’ve been able to reduce their estate taxes by as much as 90% using these tactics. For more information on using life insurance to bypass inheritance tax in Iowa, contact us by calling 800-DIE-RICH.