Monday, December 26, 2016

Avoid Inheritance Taxes in Iowa? Adopt that Nephew!

Adoption can be a wonderful thing.  My niece, in this picture, is adopted and she is a wonderful addition to our family.  However, adoption can have some funky applications in the estate planning world.  A recent ruling from the Iowa Supreme Court was interesting on a couple of issues involving an adoption:
  1. To avoid paying inheritance taxes for a bequest to a non-lineal descendant, a nephew was adopted by his aunt.
  2. Even though he was adopted by his aunt, the son's biological mother was still able to include an inheritance for her son.
The first point is not all that unusual and I have advised clients of this very option.  Basically, whether you are adopted or biological, as a child in Iowa, you do not pay any inheritance tax when you inherit from your parents.  But, if you are a nephew, cousin, friend (basically a non-lineal descendant) there is an inheritance tax owed on an inheritance based on this table.  So, if reducing a tax bill is worth changing your heritage, you can be adopted by someone (even though you are an adult) and escape that pesky Iowa inheritance tax.  So, whether it is a friend, nephew/niece, cousin, attorney...stop by that friendly adoption attorney's office and do your tax planning as you enlarge your family.  Many clients find this tax plan "amusing" and don't take that step.  However, here is a clear example demonstrating its real-life application.

The second point is for a little more on the advanced side.  One of the trade-offs of getting adopted is that once you are adopted, you are normally cut-off from adopting from your biological side.  So, if your rich aunt adopts you, and then the next month your mother wins the lottery and dies from a heart attack, you don't get to share in the lottery winnings as you are no longer your mother's child.  (You are your aunt's child, essentially, and you can only have one set of parents.  Mom becomes your aunt and your aunt becomes your mom.)

However, the Iowa Supreme Court made the notation that the biological parent in this case specifically named the (adopted) child and thus that specific naming of the child was enough to counter the change in status from the adoption.  For example, if the biological parent had said "I leave my millions equally to my children", then the adopted son would not have received the inheritance from biological mom.  But, since biological parent said "I leave my estate to my wonderful son Matthew" the specific naming of that biological child was enough to "override" the disinheritance by the adoption.  The court didn't mention anything about it, but I would assume that the inheritance from the biological parent was subject to inheritance tax as technically her biological son was now her nephew.  You can't win 'em all, I guess.

Moral of the story: You can have your cake and eat it, too.

Sunday, August 21, 2016

POA Planning for College-Bound Students

It is hard to believe that my oldest daughter is heading off to college this week at Drake University.  I'm excited for her as she starts this next journey in her life.  In addition to getting all of the necessary supplies, such as towels, laundry bags, books, pepper spray, etc., it is also important that parents of college-bound kids have the kids sign power of attorney documents.  While we may still think of them as young kids, the fact is that under the law, they are legal adults and entitled to full and independent control of their financial information/assets as well as medical decisions and privacy protection.  This is regardless of the fact that you as the parent may be paying their tuition and treating them as a dependent for tax deduction purposes. 

However, it can be extremely beneficial to have your child sign a power of attorney document so that you are authorized to: obtain medical information and consent to medical procedures if necessary; access information about their accounts, or even access grades.  This isn't just continuing to be a "helicopter parent", but there is a legitimate reason for all adults, regardless of the age, to have these planning documents.  For now, it is just another item to add to that "back to school" list.   

Good luck Holly!

Monday, May 30, 2016

Second Marriages and Estate Planning

Not every marriage works out.  Duh.  Sometimes, after one ends, another marriage begins and several challenges begin.  You have the challenges of "mixing" families together, learning about snoring patterns, and discovering a new person.  You also frequently have the challenge of dealing with estate planning.  I'll skip the issues with snoring and focus on some of the estate planning points.

If you are smart...and brave...bring up the subject of a premarital agreement (or a "prenup" if you prefer).  Just don't wait until you are on the way to the ceremony.  Not exactly a romantic subject and many people will steer clear of it because of the delicateness of the topic.  ("You think we are going to get divorced!?!")  The premarital agreement can provide protection for each other, not only in the event of a divorce, but also upon the death of one of you.  Remember: you can't disinherit your spouse as part of your will or trust estate plan after you are married.

Frequently, second-marriage families don't do a premarital agreement.  Maybe they didn't have much in assets when they got married or maybe they just didn't think about it when love is in the air.  "Post marital" agreements are not valid in Iowa so you won't be able to visit this topic down the road once you are hitched.  So now what?

We now have another option under the Iowa Code:  The "Post Nuptial Trust". 

Let's say you (1) you have a second marriage situation; (2) you don't have a premarital agreement; and (3) you have some property that you want to make sure it goes to your children (e.g., you inherited the family farm).  With proper...and careful...planning by a knowledgeable trusts and estates attorney, we can legally draft documents to allow you to transfer that property to your children without the concern of the spousal share election "re-routing" where that property ends up after your demise.

Sunday, March 20, 2016

Gaining--Not Losing Power--With Immediate Power of Attorney Authority in Iowa

A financial advisor recently reached out to me regarding the impact of a Power of Attorney document concerning financial matters.  In particular, the question was whether the person signing the document (the "principal") loses any power or authority once they sign the POA document. 

As a reminder, the default rule (and recommended direction in my opinion) is that the agent's power is immediate upon signing.  In other words, it is not necessary to wait until the principal is incapacitated before there is authority for the agent to be able to act on behalf of the principal.

So the question is: "Once the principal signs the POA for an immediate power, does that principal lose any power/authority?"  Quick answer: No.

The POA document in this scenario simply adds another individual as an authorized party to deal with accounts or other financial interests.  Thus, the principal can continue to operate as normal.  The principal also has the ability to remove the agent at any time and notify any third-parties that the agent's authority has been terminated.