May 22, 2018
In this column, I’ll focus on the continued importance of estate and succession planning in light of recently passed congressional estate tax reform. Remember, in the Tax Cuts and Jobs Act passed in December, Congress temporarily (through 2025) raised the exemption for estate, gift and generation-skipping taxes from $5 million to $10 million (or $11.2 million adjusted for inflation) for an individual and $22.4 million for a couple. So, the question many families are asking is whether there is still a need for planning since the federal estate tax is not an issue for most individuals or couples.
The short answer is an emphatic yes! The change in tax laws should not prevent families from planning.
The congressional relief on the tax front does allow us to focus on other areas that are no less important than taxes. For instance, designating beneficiaries and examining beneficiary designation forms is very important. From a legal standpoint, designating the correct beneficiaries is often overlooked during the estate planning process.
Keep in mind that a will or trust agreement only directs the disposition of assets in the estate or trust. A life insurance policy is a contract that directs the distribution of the insurance funds to designated beneficiaries. Thus, a good estate plan will include a review of life insurance and other financial instrument designations.
Involve family in discussion
This may also be the time to involve the family, including farm successors, to enter the conversation. Every family has different dynamics, every farm has a different operation, and every legal situation involved is different. That said, it’s often helpful to involve the family from the beginning of the process.
Family involvement can come in different forms. Some parents bring the entire family, including the farming successor “to the table” and involve them in the discussion at the outset. Some parents have a plan in mind, get the essential documents drafted and then involve the family to discuss how the plan will work.
Each family and each farming operation needs a personalized plan and should consult with their “team” of legal, financial and tax advisers before making these important decisions. Removing some of the concern over taxes, may give us a unique opportunity to focus on end-of-life decisions, such as making a plan for dealing with incapacity, memory loss or life-altering disabilities.
Timely Tips question
Occasionally we get a reader question that was originally directed to the Wallaces Farmer Timely Tips panel that involves a legal issue. This one is from a reader regarding Iowa’s inheritance tax, and it ties in with our theme of “other” reasons to plan.
I have heard talk about Iowa’s state inheritance tax and want to have a better understanding of the tax and how it is different from taxes that might be due upon death at the federal level? I’ve heard that the tax applies to some gifts or bequests, but not others. Can you explain?
We receive variations of this question from time to time. In reviewing bills proposed in the Iowa Legislature this past legislative session, there were several bills relating to the Iowa inheritance tax (See Senate Files 82, 103, 2038, 2043, 2303 and House File 2129). Typically, we see at least one or two bills proposing to repeal the Iowa inheritance tax every legislative session. Generally, there isn’t much movement on these bills, since the Iowa inheritance tax doesn’t impact very many individuals. Why is this? I will explain.
Though it seems unlikely that these bills will pass, Iowa’s inheritance tax is a topic that is often overlooked when families focus on planning and could be a potential pitfall in a nontraditional estate planning scenario. I recently spoke to a group of landowners regarding estate planning and one of the attendees mentioned a farmer who left farmland to an unrelated friend. The farmer didn’t have any heirs to take over the farm and wanted to help a friend. The hidden consequence is that Iowa inheritance tax would apply in that situation.
There is no Iowa Inheritance tax due upon death if the net estate of the person who passes is less than $25,000, if the estate is left to a U.S. charitable, religious, education or veterans organization, or if estate shares are left to a surviving spouse or to parents, grandparents, great-grandparents, children, stepchildren, grandchildren, great-grand-children or other lineal ascendants or descendants. So, if you wanted to leave some or all of your estate to a sibling, niece or nephew, aunt, uncle or cousin, the estate would be subject to the inheritance tax, according to a tax schedule published by Iowa Department of Revenue.
If you would like more information on the Iowa inheritance tax, there are some good sources. The Iowa Department of Revenue has published an introduction to the tax on its website. Iowa State University Extension has also published an in-depth overview by Extension farm management specialist Melissa O’Rourke.
Herbold-Swalwell is an attorney with Brick-Gentry PC in Des Moines.
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