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Back to School: Political Science- How Changes to Legislation Impact Your Estate Plan

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legislative building

On the GFLF blog this month, we’re going “back to school” with some fun legal lessons like last-minute gifts of personal property, nonprofit operation, and what planned giving actually means. Happy learning! 

If you have an estate plan already, give yourself a high-five! You’re well on your way to establishing a worthy legacy; effectively and efficiently transferring your hard-earned property; and saving your loved ones time, money, and emotional turmoil. Plus, you’re ahead of the more than half of Americans who haven’t done any estate planning!

Even though estate plans never expire there are many reasons you might need to revise or at least double-check your documents. Some common life events that could impact your documents and/or estate planning goals include: the birth of a child/grandchild; death of a beneficiary; marriage; divorce; moving across state lines; receipt of an inheritance; and other major financial status changes.

5 Scenarios for Estate Planning Revisions

I recommend my clients review their plans at least annually and if there’s any question if a life change would require an estate plan revision, it’s better to just ask! (Reminder, I offer a free one-hour consult! Even if I didn’t draft your current estate plan, I’m happy to discuss your situation to determine if an updated estate plan is in order.)

It can be easy to forget or overlook changes that occur outside the realm of your personal life that may impact your estate. For instance, changes in federal or state legislation could render your current estate plan provisions ineffective and irrelevant. A recent example that had a major impact was the Tax Cuts and Job Act of 2017.

Legislative Changes

The Tax Cuts and Job Act doubled the estate tax exemption, meaning the law massively increased the total amount of assets you can own before you are subject to estate taxes. For an individual to be subject to estate tax, your estate must exceed $11.2 million. For a married couple, the estate tax has no effect until total estate is worth more than $22.4 million. In short, the federal estate tax really only applies only to the richest of the rich.

What the New Tax Law Means for Your Estate Plan

Blast From the Past

But in 2017, before passage of the TCJA, the estate tax exemption was half of what it is now. Even more relevant, in 2001, the estate tax exemption was much, much smaller, just $675,000. From 2002-09, the estate tax ranged from $1 million to $3.5 million. Back in those days, even middle-class and certainly upper middle-class Iowans had to have some concern about the estate tax. After all, if you add up all your assets–real estate, vehicles, retirement benefit plans, insurance, etc.–you can reach that threshold surprisingly quickly.

Tax Talk: If You Die in Iowa is There a State Estate Tax?

Complex Trusts

It used to be that estate planners would establish complicated trusts to make certain clients avoided the estate tax. One example (of many) of such a complex trust is the A-B marital trust.

The A-B trust was almost entirely designed to minimize estate taxes. It was one trust, but with two parts. Under the A-B trust, the “A” trust holds the portion of the estate designed to qualify for the martial deduction, while the “B” trust was designed to maximize any unused estate tax exemption for the surviving spouse.

Now, an A-B trust isn’t as necessary unless a single person’s estate is greater than the federal estate tax threshold. (It might be necessary in a state that had a state estate tax, but Iowa does NOT have a state estate tax; we need only worry about the federal estate tax).

Estate planning for Married Couples: Avoid Conflicts of Interest

Cut the Complications

The upshot of the recent legislative tax change is that some folks could do with a much more simple trust than what they currently have. Considering the new estate tax regime, a simple revocable living trust will much more neatly fill their needs, and also be more easily interpreted, explained, and more easily defended in case of challenge. Also, with a simple revocable living trust, less can go wrong. There need not be any legale “Rube Goldberg” contraptions designed to avoid a federal estate tax that won’t apply anyway.

Funding and Administering Your Living Trust

We’re Not Just Talking Taxes

It’s important to know that estate planning is not just about protecting your estate from taxes. The benefits of estate planning are many when compared to dying intestate (without a will), including but definitely not limited to:

Plus, a good estate plan should be written to fit with your personal goals. It can be hard to think about a world where you won’t be alive, but it’s also a reality we must all face. How we prepare for our death (or incapacitation) can mean a world of difference for the loved ones and favored causes we leave to carry our torch on into the future.

Trusted Consultation

Was your trust drafted when the federal estate tax was lower? For the good of your loved ones, let’s optimize your planning strategy. If you’re not sure what kind of trust you have, or whether it really fits your situation, don’t stress one second. I offer a free one-hour consultation! Truly, I would love to hear from you; email me at gordon@gordonfischerlawfirm.com or call me at 515-371-6077.

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Tax Talk: Iowa’s Inheritance Tax

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money in wallet

We talk about taxes and fees a lot in estate planning because if you don’t have a quality plan in place your estate will likely be hit with taxes and fees to a varying degree. Actual figures depend on the gross value of your estate, what state you lived in, and what strategies you employed (such as a living revocable trust) that help to reduce or even eliminate taxes and fees.

Recently I wrote about one specific tax that only applies to states—the state estate tax. If you don’t have time to read the full post and live in Iowa, the bottom line is that generally you won’t need to worry about it. Unlike places like Minnesota and Illinois, Iowa does not have a state estate tax. However, Iowa DOES have a special “death tax” that only six states in the U.S. have.

Tax Talk: If You Die in Iowa is There a State Estate Tax?

What is an Inheritance Tax and how is Different than an Estate Tax?

At first glance the inheritance tax seems mighty similar to the estate tax (both state and federal). Indeed, both are collected after someone’s death. However, an estate tax is assessed by the overall gross value of a person’s estate. This figure totals up all assets passed to all beneficiaries, regardless of their relationship to to the decedent (the person who passed away).

Any estate taxes owed are paid out of the estate assets before beneficiaries receive their distributions. And, the estate executor is responsible for making certain any state or federal estate taxes owed are fulfilled.

The inheritance tax, instead, is a tax levied on assets and property certain beneficiaries have inherited from someone who has died. I say “certain” because in most states the relationship of the beneficiary to the person who died determines if inheritance tax is owed or not. Amount of tax owed is calculated on each eligible beneficiary’s share of the estate and the beneficiary’s relationship to the decedent.

The beneficiary subject to estate taxes is personally responsible for filing the tax. In Iowa this means filling out Form 706 and filing before the due date on the last day of ninth month after death.

What the New Tax Law Means for Your Estate Plan

Iowa’s Inheritance Tax

The good news in light of all this tax talk is that Iowa’s inheritance tax only applies in certain situations. Not every Iowan who passes away will render their heirs subject to more taxes. For instance, Iowa’s inheritance tax does not apply if the estate is valued at $25,000 or less.

The following, among others, are exempt from Iowa’s inheritance tax:

  • Spouses
  • Beneficiaries who are descendants including children (biological and legally adopted), stepchildren, grandchildren, and great-grand-children.
  • Beneficiaries who are lineal ascendants such as parents, grandparents, and great-grandparents.
  • Life insurance
  • Annuities purchased under a retirement or employee pension plan
  • Assets left to U.S. charitable, religious, and educational organizations

As you can see, most people won’t ever have to deal with Iowa’s inheritance tax. So, who isn’t exempt as a beneficiary? Domestic partners, friends, and non-lineal relatives such as nieces, nephews, siblings, aunts, uncles, and cousins are all subject to the inheritance tax on the assets they inherit. Assets bequest to corporations or social/fraternal organizations don’t fit the qualifications as “educational, religious, or charitable” and are therefore not exempt.

Iowa’s max inheritance tax rate is 15%. (Which is better than our neighboring state of Nebraska, which has the highest top inheritance tax rate of 18%.)

In case you were wondering, there is no federal inheritance tax to worry about.

How do I Know if my Estate or Beneficiaries will owe Taxes?

pyramid on a US bill

Consult with an experienced estate planner and other professional advisors so that may they thoroughly evaluate if your estate will be subject to estate or inheritance taxes. Regardless, it’s a good idea to start looking into strategies and estate planning tools to reduce the burden of (all) taxes on your beneficiaries.

One way to do that during your lifetime is to gift (cash or non-cash) assets during your lifetime. The gift tax rate is currently at $15,000. Meaning the IRS will allow you to give away up to that amount, per donee (person receiving the gift), every year, without facing a gift tax.

I also highly recommend consulting an estate planner and other related trusted professional advisors to review your estate planning goals, financial situation, and assets. There are all sorts of unique considerations people face in that demand a thorough review and thoughtful solutions.

Have any questions or owe inheritance taxes yourself? Don’t hesitate to contact me at gordon@gordonfischerlawfirm.com or by phone at 515-371-6077.

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Tax Talk: If You Die in Iowa is There a State Estate Tax?

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Rows of 100 dollar bills

There’s that pragmatic, and slightly depressing saying that the only sure things in life are death and taxes. But what about taxes on death? Just like you can’t escape taxes in life, they government can tax your estate at death. Indeed, it’s often referred to as the “death tax.”  And, just like taxpayers file both federal and state income taxes, there are both federal and state estate taxes.

People having a meeting at a desk with papers

What is an Estate Tax?

When a U.S. resident dies, an estate tax may be levied against the gross estate, which includes the fair market value (FMV) of all owned property, as well as any assets the deceased had interest in (e.g. assets like life insurance). Think of it like the gross income figure you calculate for income tax returns.

Federal Estate Tax

Let’s start with federal estate taxes. Because this is a federal tax, this applies regardless of what state you die in.

Not too long ago, I reviewed the Tax Cuts and Jobs Act’s (TCJA) impact on estate planning. (Why? Because smart estate planning accounts for taxes and employs strategies that minimize said taxes.) One of the most significant changes from the “new tax law” was with the estate tax exemption. This is the figure subtracted from an estate’s gross value in order to calculate federal taxes.

What the New Tax Law Means for Your Estate Plan

For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individual to an approximated $11.2 million. (Why do I say approximated? Because the exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and indexed for inflation.) In plain terms, this means each individual should be able to pass over $11 million to their heirs before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with thoughtful estate planning.)

The bottom line: if your estate is worth less than the federal exemption rates, it will be free from the estate taxes after you die. If you have an estate valued at more than the exemption threshold (and smart estate planning strategies are not appropriately implemented to shield assets from being counted in your estate’s gross value), your taxable estate will met with a tax rate of up to 40 percent.

State Estate Taxes

The caveat (and good news for residents of the majority of states) is that not all states have a state estate tax…including Iowa! Currently, 12 states and D.C. also impose an estate tax on residents. It’s important to note that the exemption rates for these state estate taxes are much lower than the federal exemption rate. For instance, our neighbors to the east in Illinois have an exemption rate of $4 million and a graduated marginal tax rate of of o.8 to 16 percent.

Here’s an incredibly helpful map from Tax Foundation that illustrates this.

estate tax map

Note: figures may have changed since time of publication of this map.

Is there any reason an Iowan would need to account for state estate taxes in their estate planning? Only if they own real estate in another state. Let’s consider a hypothetical example to explain this better.

Alice with her Minnesota Lake House

Alice is an Iowa resident. She died in March 2018 owning a vacation home on her favorite lake in Minnesota. Alice’s gross estate totals $2.8 million. What estate taxes will Alice’s estate be responsible for?

Iowa’s Inheritance Tax

While Iowans largely escape the state estate tax, there is a state inheritance tax. The inheritance tax is different than the estate tax (although they they are often incorrectly used interchangeably). The estate tax is based purely on gross value and regardless of who inherits what; the inheritance tax is only charged against the share of inheritance of certain estate beneficiaries.

There’s a lot to note about Iowa’s inheritance tax, so I’ll do a deep dive into that here on the GoFisch blog later this week!

Questions about how taxes (and other fees) may affect your estate plan? Need to revise your current plan after changes to the tax code? Don’t hesitate to contact me via email at gordon@gordonfischerlawfirm.com or by phone (515-371-6077).

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Legal Words of the Day: Tangible Property & Intangible Property

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magnifying glass over book

When most people use the word “property,” they typically mean real estate or land, such as: “She owns 50 acres of property in Harrison County.” But, for estate planners, the word property has a much broader meaning. For estate planners, property is what we lawyers call a “term of art.” A term of art is a word or phrase that has a specialized, specific meaning within a particular field (such as the legal profession). Terms of art are abundant in the law; other legal terms of art you may have heard of include “double jeopardy,” “burden of proof,” and “punitive damages.”

bookcase with ladder

Two Broad Classifications

There are two broad classifications of property—real property and personal property. Real property includes land and whatever is built on the land or attached to it. It includes buildings (like houses and grain silos), fences, tile lines, and mineral rights, for example.

Personal property is best described by what it is NOT. Anything and everything that is not real property, is then personal property. It can be easiest to think of this in terms of movability. Typically real property cannot be picked up and moved. Yes, you could dig up dirt from your plot of land and move it to your neighbor’s plot of land, but you cannot actually “move” the land.  And, sure, you could argue that you could move a shed from one corner of the yard to another, but not easily.

To drive this point home, let’s think about that shed. Let’s say I want to build a shed. The lumber, tools, and paint I brought to the site to build the shed are personal property; the shed itself is real property.

Intangible and Tangible Property

Personal property is broken down into tangible property and intangible property. Tangible personal property has physical substance and can be touched, held, and felt. Examples of tangible personal property are numerous, just a few examples are furniture, vehicles, baseball cards, cars, comic books, jewelry, and art.

Intangible personal property includes assets such as bank accounts, stocks, bonds, insurance policies, and retirement benefit accounts.

(Legal) Word of the Day: Property

Pop Quiz!

Can you classify the following as real property, tangible personal property, or intangible personal property?

Your Twitter account.

This is intangible personal property. Yes, your social media presence and digital accounts are intangible property. (Don’t forget to account for this property in your estate plan!)

Your IRA.

Again, this is intangible property.

Farmland, including its silos and fences.

Real property.

Your comic book collection.

Tangible property!

MacBook Air laptop computer.

Your computer is tangible property. But, it may contain intangible property which could well have monetary value, such as a document containing a recipe you wrote on how to bake a better apple pie, or a software you programmed.

This quiz, and overall discussion about property, sparks a big question…

What Happens to Your Property When You Die?

When you die, what happens to your property depends in large part on whether you have a will (as a part of a complete estate plan) or not. If you have a will, then your property will pass to your beneficiaries just as you intended. An exception: some intangible personal property, such as retirement and bank accounts, have beneficiary designations. Such property will pass to its intended beneficiary without a will. (Don’t forget a beneficiary designation trumps what’s written in a will, if there is any discrepancy between the two.)

If you die without a will, you are leaving it up to the Iowa intestacy laws to decide who will receive your property. Decisions as to who of your heirs at law receive your property will be made without any regard as to what you may have wanted, or may have not wanted, if you would have had a say in the matter. Long story short, it’s a good idea to put an end to the excuses and enlist a qualified estate planner to draft your personalized, quality estate plan.

How Much Does an Estate Plan Cost in Iowa? Rates Should be Transparent!

Whether it’s real or personal, tangible, or intangible, act now to protect and prepare your property for the future. Get an estate plan. You can reach me most easily by email at gordon@gordonfischerlawfirm.com or call my cell, 515-371-6077. Don’t delay—write or call today.

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Charitable Giving: As American as Apple Pie

Earlier this month we launched fireworks, grilled burgers, and spent time with loved ones while celebrating the Fourth of July. America’s Independence Day stands as a surrogate of sorts for the ideals that our great nation was built on. The Fourth of July has always been a special holiday for me, and my family, as my parents immigrated to America from Germany just before the Iron Curtain came down.

Red, White & Blue: Happy Independence Day!

Along with life, liberty, and the pursuit of happiness, I like to highlight the freedom we have to give charitably to the causes and organizations that are important to us. The most economical, tax-wise philanthropy can involve unique strategies (like “bunching” multiple years’ worth of giving into one year) and gifting non-cash assets (such as appreciated stocks). You can also consider writing charitable bequests to the tax-exempt organizations you support into your estate plan. The bottom line? There are so many different, effective charitable giving tactics you can employ to support your community. In turn, it makes America an even better place to live!

I’ve blogged about many, many tax-wise charitable tools and techniques, but here are just four (in honor of July 4th) you ought to consider (in no particular order):

Charitable Gift Annuities (CGAs)

A charitable gift annuity is a contract. More specifically, it’s a contract between a donor and a charity, whereby the donor transfers cash or property to the charity in exchange for a partial tax deduction and a lifetime stream of annual income from the charity.

Sweet Sixteen: 16 Reasons Charitable Gift Annuities Are Great Tools for Philanthropic Giving

Charitable Remainder Trusts (CRTs)

A charitable remainder trust is a very useful type of trust. It’s an an irrevocable trust that generates a potential income stream for you, as the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to your favorite charity or charities. I break down CRTs here.

Charitable Lead Trusts (CLTs)

A charitable lead trust is perhaps most easily defined as the inverse to the charitable remainder trust (CRT). A charitable lead trust is an irrevocable trust designed to provide financial support to one or more charities for a period of time, with the remaining assets eventually going to family members or other beneficiaries.

Simple Bequests

We may forget with all the fancy tools and techniques that are available, but let’s not forget that a simple bequest, to the charity or charities of your choice, can be incredibly powerful! In fact, even a game changer for many nonprofits. Consider adding your favorite charity to your will. And if you don’t have a will yet, that’s the first step you should take. You can download my EPQ for free to get started on building the estate plan that will help provide for your family AND favorite causes.

green plant growing

Whatever your giving goals and financial situation, I can help you structure your philanthropic gifts, so they provide maximum tax-wise benefits, while also ensuring your charitable intent is both respected and followed. Get smart about giving and contact me at Gordon@gordonfischerlawfirm.com or 515-371-6077. I offer everyone a free one-hour consultation.

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What the New Tax Law Means for Your Estate Plan

US capitol building against a blue sky with flag

Changes to the tax code can and often do impact estate planning because one of the major goals for most is to reduce or eliminate the taxable amount of the estate. Passed at the tail end of 2017, the Tax Cuts and Jobs Act (otherwise referenced as the new tax law), is no different and there were some major changes that will no doubt impact estate plans moving forward. What did the Act change, what didn’t it affect, and what should you do to maximize your benefits?

Estate Exemption

congress building

One of the most significant changes under the new tax law are the estate-related exemption amounts. The estate tax exemption—or estate tax exclusion as it’s sometimes referred to—is the figure subtracted from an estate’s gross value for the purpose of calculating federal taxes.

This change is one that all estate planning individuals, especially those classified as middle- to high-net worth, need to be aware of. For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individuals to an approximated $11.2 million. (The exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and still indexed for inflation.) This means each individual should be able to shelter over $11 million before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption for tax year 2018 now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with.)

Important Considerations

Other estate planning related taxes

glasses on paper with laptop

None of the estate, gift, or generation-skipping taxes were repealed by the new tax law, and the tax rates for these remains at 40 percent. Just for review: the federal estate tax is applied to the transfer of property at death; the gift tax applies to transfers made while living; and, the generation-skipping transfer tax is applied to transfers of property that skip a generation.

However, these transfer taxes (sometimes referred to as excise taxes) will apply to fewer estates given the major increase to the exemption figures. (The Joint Committee on Taxation estimates the number of taxable estates will drop to 1,800 in 2018, compared with 5,000 estates under the previous tax law.)

Gift tax annual exclusion

Discussing gift tax can be confusing when you consider there is an annual exclusion amount and a lifetime gift tax exemption. Let’s clarify some important points, so you can feel great about gifting to your loved ones!

In the 2018 tax year, the annual gift tax exclusion will be $15,000. This is up from the $14,000 it’s been stuck at for the past half-decade. This annual gift tax exemption is inflation-based, but only raises in increments of $1,000, which is why it took the rate five years to increase.

This means you could gift up to $15,000 to an individual without cutting into the lifetime gift tax exemption. You can give gifts up to that value to multiple individuals. Meaning if you have three adult children and want to gift each of them $15,000 in the 2018 tax year, you could do so and it would be completely exempt from the gift tax. If you’re married (and your spouse consents) you can give a joint gift (otherwise referred to as a split gift) of up to $30,000 per individual in the 2018 tax year.

Let’s say you, as an individual, want to gift a grandchild $20,000. That $20,000 is $5,000 greater than the annual gift tax exclusions and that $5,000 would then be counted toward the lifetime exemption rate (the $11.2 million previously discussed).

Timing

black and white timer

Because the new exemption rates are only instated (as of right now) through the 2025 tax year, on January 1, 2026 the exemption basis will revert back to where it was for the 2017 tax year—$5 million exemption per individual. (Of course, the actual figure will be larger because it will still be indexed for inflation.) Congress could choose to extend this exemption rate past 2025, but they could also choose not to. There could also be further changes to the tax law after future congressional and the presidential elections.

Basis adjustment

There was no change made to the step-up in basis rules. Meaning, when you pass, assets left to beneficiaries are reset to the fair market value at the date of your death. This is a benefit when it comes to taxes for both the whomever inherits the property and helps simplify taxes because there’s no guesswork as to what the property was worth when the testator (the person who made the estate plan) acquired it.

Actions to Take Today

If/when the exemption amounts are reduced, there will be no “clawback,” allowed, meaning that gifts and transfers made up until 2025 will not be later subjected to taxes. That means if the increased exemption rate could have an impact on your estate and allows you to make gifts increased in quantity or value, time is of the essence. Where to start?

woman looking up

Research & consult on your options

There are a few different approaches to gift-giving that could be particularly fitting with the tax changes. Look into establishing and funding a new irrevocable trust or gifting to an existing one. Contemplate how gifts could be applied toward life insurance funding or present sales to trusts. For the charitable-minded individual, the higher exemption amount represents an opportunity for increased philanthropy—consider a tool like a charitable lead trust.

Discuss your options with the appropriate professionals such as your estate planning attorney, financial advisor, and accountant. They’ll be able to advise on tools and strategies you’ve researched, but also provide clear information and counsel of options you didn’t even know about. It’s your professional advisors’ jobs to present you with all the info (benefits and potential detriments) you need to know to make an informed executive decision regarding your estate.

Review estate plan

You should review your estate plan annually regardless of any legislative changes, but with the new tax law you’ll certainly want to review your will, any trust documents, estate planning goals, and overall tax strategies. Again, discuss your options with a qualified estate planner!

Update Your Estate Plan: How, When, & Why

Contact me for a free consult

Let’s talk about what the new tax laws mean for you, your family, and your legacy. How can you leverage the increased exemption rate to make a difference in your community? How can you better prepare your heirs when you’re not around to support them and offer guidance? Contact me for a free consultation via email or by phone (515-371-6077).

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When is a Trust Not a Trust?

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question mark cards

Similar to the bad joke, “When is a door not a door? When it’s a jar!” Ha! Similarly, but not as punny, we might well say, “When is a trust not a trust? When it’s a Totten trust!”

A Totten trust, also known as a savings account trust or a poor man’s will, is not a trust at all. Rather a Totten trust is simply a name given to a type of savings account. In this savings account, the depositor opens an account with her name designated “as trustee for” someone else. In a Totten trust, there is nothing stopping the depositor from withdrawing the funds for her own use, at any time during her life. Upon her death, any funds remaining are distributed to the so-called “beneficiary.”

Despite the confusing terms, no trust exists. The so-called “trustee” is not obligated to hold the property for the benefit of anyone, including the so-called beneficiary. Rather, the depositor can withdraw funds for her own use at any time during her life.

A Bit of History

The name—Totten trust—came from a New York case where their legality was tested, called In re Totten. The court ruled it was fine for one to open a banking account as a trustee for another person, who had not right to the funds until the account owner passed away. Previously courts had not allowed this under the objection that the situation could take the place of a will, which required more formality than this bank account scenario. To legally maneuver around this the Totten court called the account a “tentative trust” in which the account owner acts as trustee of the funds that will someday go to the trust’s beneficiary. After this decision other state legislatures authorized and regulated such accounts. Often they were referred to payable-on-death accounts in lieu of the term Totten trusts, but regardless of name, the result is the same.

Iowa & Totten Trusts

In states like Iowa, where Totten trusts are recognized, the proceeds for the account pass to the named beneficiary outside of the probate process. The treatment is just like a POD (“payable on death”) account or TOD (“transfer on death”) account.

Iowa recognizes Totten trusts generally, but specifically excludes them from the Iowa Trust Code. Iowa law describes legal trusts as follows:

‘Trust’ means an express trust, charitable or noncharitable, with additions thereto, wherever and however created, including a trust created or determined by a judgment or decree under which the trust is to be administered in the manner of an express trust. ‘Trust’ does not include [a] Totten trust account. Iowa Code 633A.1102(18)(a) (emphasis added).

When is a trust not a trust? Hopefully, thanks to this blog post, you now know that Totten trusts are not true trusts. I’ve written quite a bit on real trusts and would be happy to talk with you about what sort of trust may be right for you. Give me a call at or shoot me an email.

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Expert Interview: Life Insurance & Your Estate Plan

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Two people looking at sunset

When you think about estate planning, life insurance doesn’t come to mind first. Your house, collectibles, and 401k? Sure. Yet, life insurance is present in almost every quality estate plan and can serve as a source of support, coverage, and liquidity to pay death taxes, expenses, fund business buy-sell agreements and sometimes to fund retirement plans. A life insurance policy, when used correctly, can be used to protect your estate and ensure your lasting legacy. Yet, for even the savviest of people who have a plan in place for the future, how life insurance fits into the estate planning puzzle can prove complicated.

puzzle pieces all mixed up

Enter Christa Payne, a Financial Representative for Country Financial in North Liberty, who was generous enough to share her expertise on the subject. Christa has been with Country Financial for over seven years and you can tell she’s passionate about what she does. She finds joy in being a part of planning for the future for all her clients.

Christa Payne
Gordon Fischer Law Firm (GFLF): In general, what role does a life insurance policy play within an estate plan?

Christa Payne: Generally, life insurance is a great vehicle to provide estate liquidity (in order to pay taxes, debts, administrative expenses, family allowance for surviving spouses and dependents). It can also provide debt relief or continuation plans (buy-sell for businesses, etc.), provide income replacement, and wealth accumulation…proceeds are paid to beneficiaries income tax-free!

GFLF: Can life insurance affect the amount of taxable assets of the estate?

CP: Yes, if you are the owner of the policy, it gets added into estate calculation (up to $5.49 million as of 2017). However, if you give up rights to the policy for longer than three years, it doesn’t have to be included. There are steps you can take to make sure that the death benefit or the replacement value don’t get included in the estate calculation.

GFLF: What are the options for charitable giving with/through a life insurance policy? Can you “give” or transfer your policy to a charity?

CP: Premiums can be deductible, but the owner and beneficiary both have to be the charity. Yes, you can transfer your policy to a charity or purchase a new one. Life insurance can be a great way to turn a smaller cash donation into a larger donation!

GFLF: What are some errors you’ve heard of/seen in regards to life insurance and estate planning? What should people know to avoid these pitfalls?

CP: There are many errors that can be made, including: listing the wrong beneficiary (or failing to update as things change—beneficiaries trump a will!) and having an inadequate amount of coverage in force are two major ones. People should always meet with a competent financial professional and attorney to discuss their life insurance and estate plan. It’s vital to complete annual reviews of the policy, as simple as that seems, things change, and it’s easy to forget. It’s always great to be reminded of what policy you have, how it works, and what will happen in the event of a death.

GFLF: What’s the difference for life insurance between revocable and irrevocable trusts? Is one category recommendable over another?

CP: In a revocable trust, there is no gift tax on funding the policy and it avoids probate. The death benefit, however, is included in the grantor’s gross estate. In an irrevocable trust, it avoids probate, has asset protection against creditors, and is excluded from gross estate. One is not necessarily better than the other, it depends on the specific needs of each individual client at the time the trust is established.

Let’s Talk About Your Life Insurance

Take it from Christa, life insurance as a part of your estate plan is important. If you have questions on her advice or think you need a new/updated policy, don’t hesitate to give her a call at 319-626-3516 or shoot her an email. (A resource like this research can also be useful in comparing insurance plans.)

Of course, you also need an estate plan before life insurance an be a part of it)!  Contact me to get started or fill out my obligation-free estate plan questionnaire.

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Retirement Benefit Plans: A Case Study of Four Beneficiaries

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Investment stones

With regard to charitable giving, not all assets are equal. For tax reasons, some assets may be better to pass on to heirs, while others may be better to give to your favorite causes. Consider the potential tax treatment of retirement benefit plans such as IRAs, 401(k)s, etc. A simple story illustrates why, for example, an IRA may make a better charitable gift, while other assets may be better for heirs, based on tax provisions.

Old Man Lear and his Four Beneficiaries

Consider the simple story of old man Lear and his four beloved daughters: Cordelia, Goneril, Regan, and Ashlee. (Feel free to take a break and go brush up on your King Lear!)Lear, no fool, engages in estate planning with the intention of helping each of his daughters in the future. He has four major assets: his house, stock, a painting, and his IRA. Each asset is worth roughly the same (plus/minus just a few dollars).

four sisters

  • Lear’s house is worth $100,003. He purchased it for only $20,000.
  • Lear owns shares of stock in Acme Company, valued at $100,002. He bought the stock for just $50,000.
  • Lear has a famous painting of a castle. It’s valued at $100,009; he purchased it for $35,000.
  • Lear has dutifully paid into an IRA that’s now up to $100,020.

Nothing if not fair, Lear divvies up the four assets to each daughter. Do all four daughters get more or less the same deal?

Three Tax Concepts

Before answering, we need to consider three important tax concepts:

(1)        Inheritance as income

(2)        Income in respect of a decedent

(3)        Step-up in basis (also called, stepped up basis)

The interplay of these concepts may make charitable gifts of retirement plan assets more attractive to your clients than charitable gifts of other kind of assets.

Inheritance as Income

Under our federal income tax rules, receipt of almost every type of asset counts as income. One of the rare exceptions in inheritance of property. Generally speaking, inheritance is not income, for federal tax purposes. Most inherited property passes tax-free. (It’s true there is an Iowa inheritance tax. To keep this article simple(r), I’ll focus on federal tax).

Income in Respect of a Decedent (IRD)

Of course, with every rule in federal tax law, there’s an exception. Most inherited property passes tax-free, but not all. IRD is income that the deceased was entitled to, but had not yet received, at time of death. IRD can come from various sources, including:

(1)        Unpaid salary, fees, commissions, and/or bonuses;

(2)        Deferred compensation benefits;

(3)        Accrued but unpaid interest, dividends, and rent; and

(4)        Distributions from retirement benefit plans

That’s right – retirement benefit plans are IRD.

Federal tax law provides for IRD to be taxed when it’s distributed to the deceased’s beneficiaries. IRD retains the character it would have had in the deceased’s hands.

Step-up in basis

Step-up in basis is a critically important concept. It refers to the readjustment of value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the value of the asset is determined to be the market value of the asset at the time of inheritance, and not the value at which the original party purchased the asset.

Four Beneficiaries and Four Assets

Cordelia’s inherits the house. As we discussed, there’s no federal tax on inheritance. Cordelia sells the house for $100,003. Still, no federal tax. Although Lear purchased the house for only $20,000, recall that Cordelia receives a step up in basis. Cordelia’s basis is $100,003, the fair market value (FMV) of the house. Since she sells it for $100,003, there’s nothing to tax.

House key

When Goneril inherits the stock, there’s no tax—as there’s no taxable event. Soon, Goneril sells the stock. Although Lear purchased the stock for just $50,000, Goneril receives a step up in basis. Goneril’s basis is $100,002, the stock’s FMV. Since she sells the stock for its new stepped-up basis, there’s nothing to tax.

Stocks going up

Regan inherits the painting, with the same result. There’s no federal tax on inheritance of the painting. When Regan immediately sells the art for FMV, there’s nothing to tax, as the FMV, and step-up in basis, are the same.

Paintbrushes

How about Ashlee and the IRA? If Ashlee withdraws money from the IRA, it’s a different story. Ashlee will have to pay federal income tax of up to 39.6 percent. (It is true that Ashlee could defer withdrawals from the IRA for a long time, and of course such deferral reduces the impact of taxes.)

Ira egg in nest

To sum up, in this hypothetical, the house, stock, and art passed to the beneficiaries without any taxable event, and the daughter were able to sell without tax consequences. The IRA passed to the fourth daughter, but she will have to pay taxes when she withdraws funds.

When considering charitable gifts, also consider the tax code. And, considering talking to your kids about these issues. After all, not all assets are equally beneficial to heirs. In this case, retirement benefits plans may make an ideal gift to your favorite cause.

Magnifying glass over charity

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