Few states have inheritance taxes any more, but Iowa still does. A recent court case there illustrates that the Iowa law has a strange provision.
A handful of states have an inheritance tax either in addition to or instead of a state estate tax.
Inheritance taxes are similar to estate taxes. With an estate tax, the estate itself is taxed before distribution to people. With an inheritance tax it is the tax is assessed on the people inheriting the estate.
Iowa is one of the states with an inheritance tax. However, it has an exemption for the tax when it comes to children who inherit from their parents. However, Iowa changed that exemption in 2003 to exclude children who inherit from stepparents who have divorced their natural parents.
That change was the subject of a recent court case as McClatchy reported in “Court: Kids of Divorced Stepparent Must Pay Inheritance Tax.”
Tyler and Mark Acorn remained close to their stepfather, after he divorced their mother. He left them most of his estate.
The state of Iowa sent the Acorn brothers an inheritance tax bill of $200,000. They sued, claiming they were being punished because their parents divorced.
The Iowa Supreme Court ruled that the state had a legitimate interest in keeping families together and that the Acorns’ rights were not violated.
Iowa’s provision is unique.
If you live in one of the states with an inheritance tax, then it is important to keep that in mind when you plan your estate.
You will need to make sure that your heirs have the assets to pay the tax without having to sell something you want them to inherit.
Reference: McClatchy (Nov. 17, 2017) “Court: Kids of Divorced Stepparent Must Pay Inheritance Tax.”