Sunday, August 26, 2007

Iowa Attorney Fees in Probate

Attorney fees in probating an estate of a deceased individual in the state of Iowa are set by the court. Pursuant to a state statute, the ceiling for fees is approximately 2%. Iowa Code section 633.198. While the statute states that it is the maximum, many Iowa attorneys treat it as the standard flat fee and will request - and often receive - fees based upon the 2% figure whether the amount of work equates to the 2% fee or not. Life insurance death benefits are not included when applying the 2% fee, but IRA's, 401k, jointly owned property, real estate, etc. are all included.

If there is "extraordinary" services rendered, attorneys can also request extraordinary fees. Iowa Code sec. 633.199. The statute sets out some examples of extraordinary services, such as sale of real estate, litigation and tax issues. Such fees are in addition to the ordinary 2% fees.

An option to avoid paying attorney fees based on this flat rate system and approved by the court, whether the 2% ordinary fee or extraordinary fees, is to establish and properly fund a revocable trust during your life. A revocable trust permits the administration of a deceased's estate without having to go through probate and court administration. This gives the trustee the abiliity to negotiate with attorneys on an agreeable fee.

Tuesday, August 07, 2007

There's Gold in That There Dirt

A recent article highlighted the "pot of gold" that many Iowa landowners are sitting on. While the residential real estate market has taken a downturn across the nation, farmland values continue to experience double digit growth in Iowa and surrounding states. The increasing focus and benefits of renewable energy continue to push land values higher and higher.

As a by-product of this increased growth, landowners' taxable estates are increasing, thereby creating potential estate tax exposure for their heirs. There are several methods for landowners to reduce-if not eliminate-any federal estate tax created by the increases in farm values. Many individuals may not consider these issues as farmland values have risen so sharply in the past few years that unless an owner is looking to sell, he or she may not even realize the total value of their taxable estate.

Wednesday, July 25, 2007

The Gifting Season Approaches

Gifting can be an easy way to transfer your wealth to the next generation. Currently, each person is entitled to gift up to $12,000 per individual, per year, without incurring any gift tax or having to file a gift tax return. Gifts that are less than $12,000 per donee per year are typically called "annual exclusion gifts".

Also, during your life, you can gift up to $1,000,000, on top of your annual exclusion gifts, to others without having to pay gift tax. However, any gifts in excess of the annual exclusion will require a gift tax return. Furthermore, dipping into the $1,000,000 "bucket" reduces the amount that you can pass at your death free from estate tax.

If you would like to reduce the size of your taxable estate and see the appreciation from transferring your wealth to kids, grandkids, or others, gifts can be a great solution.

Sunday, July 22, 2007

Stepped-Up Basis - One Benefit of Dying (But not for you)

Dying is such a bad thing that the IRS has a couple of ways to help your loved-ones deal with the loss. One of the tax benefits is a concept called "stepped up basis" which applies in the area of capital gains tax. What this means is that assets you own at your death, with a few exceptions, will have a new tax basis equal to the value on your date of death. In order to understand the benefit of this tax benefit, consider this illustration:

You bought shares of a stock for $10,000. That is your cost basis. Your investment does great (unlike my selections) and it has increased in value to $15,000. You decide to take cash out and take your money. You will be capital gains tax on the increase of $5,000. (Market value less your cost basis.)

However, let's say right before you were able to sell the stock, you step on a rake in your yard, stumble backwards and get hit by a Hummer and killed instantly. Your estate would be able sell the stock and the new cost basis would be equal to the market value at the time of your death ($15,000 in this case.) Thus, if the stock was sold the same day, there would be no capital gains tax at all. Not a bad deal...just not for you.

And who said there was nothing good about dying?

Wednesday, June 20, 2007

Non-Testamentary Transfers

Your Last Will and Testament or Trust will determine who inherit your assets. However, the innocent situation arises in many cases where those other assets-like life insurance, POD accounts, retirement accounts, or jointly owned assets-pass outside and irrespective of your testamentary documents. This can potentially seriously disrupt your estate plan and create several issues such as questions on the payment of estate/inheritance taxes on those transfers, insufficient assets in the estate to pay administration/funeral costs.

Estate planning is more than just drafting and signing a will and trust. It is a comprehensive review of the financial situation and the assets and how those assets are owned. Your planner should guide and assist you with this review. Remember: how those assets are owned will dictate who owns them in the end.

Wednesday, May 30, 2007

Fund the Trust or the Trust Fails

If you have a revocable trust (sometimes called an inter vivos trust or living trust)one of the key steps is the proper funding of that trust. This entails the transfer and assignment of your assets to your trust. For example, you will need to change the ownership and title on your bank accounts and brokerage accounts to the name of the trust. Any real estate that you own should also be transferred to your trust.

So what if you don't get something transferred or forget about something? Depending on the laws of your state and the particular type of asset, it may be necessary to have your entire estate go through the probate administration process. Obviously, this negates one of the primary benefits of using a trust in the first place.

In summary, after you execute your trust document, it is just as important to make the necessary changes in the ownership status of your assets. Consult with your attorney to make sure the proper changes are made.

Thursday, May 17, 2007

Organize Your Information for Smooth Transition

A recent story on provides good advice about the need to organize your financial information for your loved ones. Dealing with the stress of the loss of a loved family member is difficult enough, but leaving a financial mess for them further compounds their stress level.

Communication is important in making your estate plans and letting your key contacts know where the information is located and keeping it easy to pull everything together, along with a list and contact information for your advisors, such as your attorney, accountant, insurance agent and financial advisor.

The article also noted that a recent survey indicated that 70% of the population does not have a will, and that many parents with young kids -- who critically need an estate plan -- continue to put off getting a will completed. Planning for that scenario is important.

Wednesday, May 16, 2007

Choosing a Trustee/Executor

When you are drafting your estate plan, one of the items that you'll have to decide is who will be the executor or trustee. The person or entity you choose has several certain important decisions and obligations. For example, they will decide whether certain tax elections are made in your estate, whether an allowance is paid to the surviving spouse, where the funds are invested and when distributions are made.

Naming more than one individual as a personal representative may be a solution that avoids any potential deadlock, but it also creates some complexity in the administration of the estate. Naming only one child as the personal representative also creates a potential source of disgruntlement from the other kids. Meanwhile, naming a corporate trustee avoids many of the a cost.

If you have any potential concerns about how your kids will handle the administration issues, leave the power to a third party alone to decide these questions, or provide for a mechanism for the kids to handle the dispute (mediation, random, etc.

Tuesday, May 15, 2007

And my Treasured Toaster Goes to...

When it comes to money and stocks, it can be fairly easy to divide up your wealth. Giving a percentage of your cash or portfolio to your beneficiaries is straight forward as it doesn't matter which fraction they receive as those types of assets are fungible. However, when you only have one family photo album or one grandfather clock, these assets are typically not able to be easily divided and quite often can lead to bitter disputes over what mom and dad would've wanted. A recent case involving a bitter dispute between siblings is reminding me that these fights happen all too frequently despite easily being able to be avoided.

To avoid those types of fights, planning ahead enables you to potentially resolve the fight with limited "bloodshed". Iowa Code section 633.276 (2007) provides that an individual can leave a signed and dated list to dispose of certain types of personal property. Thus you can determine who gets grandma's wedding ring, mom's fine china, dad's shotgun, etc. This type of list does not need to be notarized or witnessed, but just signed and dated. As this is such a basic procedure not even involving the services of an attorney, there is no excuse for not making a list of your property items. Isn't it worth doing everything possible to preserve family relationships?

Thursday, May 03, 2007

Attorney-in-Fact But Not an Attorney

A common document executed in the estate planning process is a Power of Attorney document. That document confers authority to another person, or persons, to act on your behalf either because you are unable or just want that person to handle certain matters for you. For example, you are in a car accident and can't handle payment of your bills, cash checks, etc., someone can handle those affairs for you. That person's title is the "attorney-in-fact" even though they are not typically an actual attorney in the ordinary sense. You can limit the authority of what the attorney in fact may do, or you can give them broad general powers to do generally anything necessary.

There is a also a Medical Power of Attorney in which you appoint someone to handle your medical and personal decisions, such as what medical treatment you receive or what facility you are placed at. This power only comes into play if you are unable to communicate your wishes.

These aren't required documents to have, but they are strongly recommended. If you don't have such documents in place, there are alternate ways to address these issues, but none are simpler and potentially could become divisive in certain family situations.

Sunday, April 15, 2007

Joint Ownership Bypasses Estate Plan

If you have assets that you own jointly, whether it is with a spouse, a child, grandchild or someone else, that asset will typically pass automatically to the surviving joint owner. It doesn't matter if you have a super-duper-deluxe will/trust, the joint ownership designation bypasses your estate plan and potentially short circuits any plan you may have.

For some situations, holding assets jointly might be sufficient for transferring your assets upon your death. For example, a husband and wife with no kids from a prior relationship and with modest assets. However, consider the following scenarios and the unexpected result:

Scenario 1 - John Washington has two kids. He loves them both and wants to make sure they are treated equally with their inheritance. One of his kids, Chris, lives nearby and helps John out with payment of his bills and expenses. To give Chris some flexibility, John adds Chris as a joint owner on his bank accounts so that Chris can help out without John's signature. When John passes away, those bank accounts will go automatically to Chris and his sibling will be cut out. While Chris may choose to share the joint accounts with his sibling, there is no guarantee that he will share and it may end up that Chris receives more than his "fair share". Or, what if Chris has a judgment or tax lien against him? Chris' judgment creditor could garnish the bank accounts and take John's money away for payment on Chris' debt.

Scenario 2 - Wife and Husband are both in a second marriage with kids from a prior marriage. H and W both want to preserve some assets for the children of their first marriage. But if H and W maintain joint bank accounts, those assets will pass to the survivor, and then the survivor will be able to select who ultimately receives those assets, which may be their own kids to the exclusion of their deceased spouse's kids.

Reviewing ownership information is one of the key components to your estate plan. Be sure your estate planner has all the information on how your assets are owned.

Monday, April 09, 2007

The Wonderful World of Trusts - Pt. 1

Trusts can be an important part of your estate plan. A trust is not just for the "uber-rich", but rather it is a basic procedure to control who, how and when your beneficiaries inherit your assets. For example, if you have young kids that would inherit your estate upon you and your spouse's passing, you can delay their receipt of those funds until a later point in time when they are hopefully more mature. Otherwise, without a trust, they could get a large lump sum at the ripe old age of 18 in Iowa. While it may seem hard to believe, 18 year olds are not known for being particularly frugal with their funds; whether it is $10.00 or $100,000. With a properly structured trust, you could delay receipt of those funds until later in their life, or upon achieving a milestone or some other identifable point in their life that you choose. Plus you can control how much they have access to of the trust funds until that point.

If you have young children or young grandchildren, trusts are an important-and critical-tool to act in their best interest and for their own protection. While you may not be able to be there to provide financial direction and guidance, a trust will enable them to hopefully make the right decisions at appropriate times.

Tuesday, April 03, 2007

Best Not to Wait Until its Too Late

I was recently reminded by a client's situation of a good reason to not delay your plans concerning your wealth transfer. After putting together a detailed outline of changes and ideas concerning his estate plan on his computer, he failed to contact me to implement his ideas with the necessary legal formalities, believing that he was in good health and had plenty of time to get to these changes taken care of formally.

Oops. Unfortunately, he experienced some health complications and passed away without having had made those changes. Now I am left with the unenviable task of attempting to explain to a widow why we won't be able to implement his intended changes with his estate plan despite his "informal" planning.

If you have changes to your planning, don't delay. Contact your advisor to avoid this same mistake.

Sunday, February 18, 2007

Anna Nicole Smith's Will = How Not to Plan Your Estate

Anna Nicole Smith was not a stranger to the court system during her short life and it appears that her legal disputes will continue on beyond her early death. Her will, which was filed in a California court, is generating some controversy in the news and legal community under its provisions as drafted. While it isn't even clear what state's (or country's) laws will apply, the will as currently filed specifically inherits any future children or spouses and leaves everything to her now deceased son. This 2001 will apparently was not updated since the tragic death of her son and birth of her daughter. As a result, the circular question now remains: if the sole beneficiary predeceased her, and her infant child (& husband Howard Stern) are specifically disinherited, who is entitled to receive her estate? The first step is going to be to try and find what court the fight should take place. Was she a California resident? Or was she a Bahamian as she had her house and appeared to be living there in the Bahamas.

Some states, such as Iowa, prohibit you from even disinheriting your surviving spouse unless they consent to it. In that situation, her current husband may elect out of the will, if the applicable law applies. Most states do not have a prohibition of disinheriting your children, although disinheriting future unborn children is a little unique and . . . odd. Although a dependent child could be treated differently.

Of course, whatever her estate consists of is also up in the air as the decade long fight with her prior deceased husband's son is continuing in the 9th Federal Circuit Court following the ruling from the US Supreme Court in 2006 which gave her the right to continue with her claims for a share of the fortune in federal court. With a possible half billion at stake, there is certainly an incentive for the fight to continue.

While I can only imagine what was going through the drafting attorney's head when he prepared this will, there are a few lessons to learn from this that we can apply in our situations:

  • Periodically you should review your estate plan, especially if there are significant changes in your life. Birth of a child and/or death of child and/or marriage qualify as "biggies".
  • Use an attorney who understands estate planning and listen to any recommendations they may have for you.
  • Don't get "cute" with your plans. You'll only create confusion and generate work for attorneys.

Sunday, January 28, 2007

ILIT to Save Estate Taxes. Don't you?

Normally if you own a life insurance policy, the death benefit proceeds are included in your taxable estate. Depending on your financial situation this may or may not create a taxable estate for you. With estate tax rates topping out at 45%, it is certainly worth considering some options to avoid having your family pay taxes on those insurance proceeds.

One option is to have the insurance policy owned by an irrevocable trust (sometimes called an irrevocable life insurance trust or "ILIT"). Properly structured, you can provide a mechanism to pass those insurance proceeds to your intended beneficiaries and not included in your taxable estate. There are different rules if it is an existing policy versus whether you are purchasing a policy.

However, the downside with an ILIT is that it is can't change the trust. Generally speaking with estate taxes, the more control and "strings" you control over an asset the more likely it will be included in your taxable estate. Thus, by cutting your control, you potentially remove it from your estate. By being irrevocable, you can't change the beneficiaries or pull the funds out of the trust. Like everything else in life, there are "give and takes".

There are methods in enabling the policy to be transferred to a new trust, but there are costs and hoops to jump through and should not be counted on as a sure thing.

In summary, use of an ILIT gives a person an easy step to save in estate taxes and provide for the same beneficiaries, so long as the strings are cut.

Tuesday, January 23, 2007

Somebody Take Care of My Kids...Please!

A common inquiry I receive is "who should be the guardian for my children?" and "who should be the trustee for my children's funds?" There is not a right or wrong answer to these questions. Typically, for a guardian, you'll want to name a family member or close friend who would be willing and able to assume the responsibilities. Make sure that you discuss this issue with them and that they are comfortable with the possibility.

While that certain person you select as a guardian might be a great "substitute parent" (maybe even better than you) they may not be able to hold onto a nickel without blowing it. If so, then they might not be the best person to handle the money for your kids. It is not uncommon to have one person as the guardian and another as the trustee. While this may add an additional level of complexity to the situation, it also provides for a "check and balance" system. The trustee can make sure that the funds are properly being utilized for the kids and the guardian will make sure that the kids' needs are taken care of. A trustee, if not a bank or trust company, should be someone who is comfortable with making financial decisions or associating with advisors for making decisions, handle investments and address tax returns. They should also be organized and capable of making tough decisions for the best interests of the kids.

Discussions with your spouse and family are important. Together, with the advice of legal counsel, you can select a structure that will be the best solution for your children in an unfortunate situation. . . your death.