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.

Comments

Post a Comment

Popular posts from this blog

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% o...
Read more

Compensation for Executor in Iowa Probate

-
In Iowa, the fee for the executor is set by the court and is based upon a state statute. Their fee is also based upon the size of the estate, as reported on the inventory filed with the probate court . Iowa Code section 633.197 provides that the personal representative (executor or administrator) fee shall not exceed $220.00 for the first $5,000 of probate assets, and then 2% on all assets over $5,000.00. All assets of the estate are included in the fee determination, with the exception of life insurance payable to others. Any compensation received by a personal representative is taxable income to that individual. Thus, if a personal representative is a beneficiary, they may want to consider whether to waive their fee and thus increase their inheritance, which may be free of tax, or to take their compensation and pay income tax on that amount.
Read more

Time Period to Administer a Probate Estate in Iowa

-
Iowa law limits the time period in which to administer an estate of an Iowa decedent.  Iowa Code section 633.331.  If an estate is not opened up within 5 years after death of the decedent, it will not be able to opened up.  Iowa currently does not recognize any exception to this rule. What does that mean? If there is a will and you wait more than 5 years after death before doing anything, you've waiting too long.  Good luck on the headaches of transferring any assets at that point. This doesn't mean that you always have to probate an estate, but if there are any possible assets that may need to be distributed, don't wait.
Read more