Periodically, we receive questions from readers on a variety of legal topics. Here are a few we have received this year and my thoughts.
My neighbor passed away last fall. His wife died before him. Their three children were appointed as co-trustees of his trust, and their approval of actions involving the trust must be unanimous. The grown children are arguing over the sale of certain assets, and it is breaking up the family. What can I do in my own planning to avoid such a family feud? Every family has a different dynamic, and it is important when making decisions to keep that in mind. Choosing who will be “in charge” is important when finalizing your plan. In the case above, the children could not come to an agreement and hard feelings developed.
We are all human, and our interpretations may differ. I would advise the reader to consider the dynamics between his own children. It would be wise to appoint just one person to be in charge.
The children in this situation may also need a good adviser to help them make decisions or act as a tiebreaker. A relatively new concept in the law is a “trust protector” or “trust director” — also at times referred to as an “administrative trustee” or “directed trustee.”
In 2020, Iowa’s new Directed Trust Statute provided an avenue for those families who wanted to assign certain management roles, such as investment or distribution decisions to a third party or family member with a financial background.
This is often referred to as a “trust director” in Iowa. As for a “trust protector,” Iowa Code Section 633A.4865 specifies that a trust protector’s powers may extend to certain activities, such as modifying or amending the trust due to tax changes. There has been much talk regarding tax changes at the federal level that may affect farm families, so appointing a trust protector to analyze those areas may be wise.
Also, a trust protector may have the power, among other actions, to:
- interpret terms of the trust
- protect beneficiary interests
- replace trustees and trust directors
- appoint successors to roles designated in the trust
Protecting your intent and the way you want to leave your assets is important, as every family is unique and even the best communicators can have disagreements. We all know the best way to avoid family conflict is to communicate. There is no substitute for planning and doing that as a family.
Do I have to pay Iowa inheritance tax? I have no spouse or children, and want to leave my farm and assets to nieces and nephews. I have heard that there is a tax that may apply in Iowa if I do that. Am I correct? If so, can I plan around that? The Iowa inheritance tax has been around for many years and is often overlooked. It applies in Iowa when a person receives assets from a deceased person and they are not a “lineal descendant,” such as a surviving spouse, parent, child or grandchild.
The good news is that 2024 is the last year that the inheritance tax will exist. It has been phased out, and the rates have been lowered by 20% each year since the 2021 tax year. For those who inherit an estate from an Iowan who dies in 2025 or beyond, there will be no inheritance tax.
Does a will trump a beneficiary designation? I recently inherited a life insurance policy from an uncle. I am the sole beneficiary of that policy. My uncle’s children are upset that my uncle left me the proceeds of the policy. They are the beneficiaries under his will. Do the will’s provisions supersede the beneficiary designation? Without knowing more facts, beneficiary designations attached to assets that pass outside of probate supersede the provisions of a person’s will or other estate plan.
Designating beneficiaries and examining beneficiary designation forms are both important. From a legal standpoint, designating the correct beneficiaries is often overlooked during the estate planning process. Remember, a will or trust agreement only directs the disposition of assets in the estate or trust.
A life insurance policy is a contract that directs the distribution of the insurance funds to designated beneficiaries. Thus, a good estate plan will include a review of life insurance and other financial instrument designations.
A young man, who farms with his dad, wants to start a trucking business to haul grain. The operation would include his father and possibly a cousin. Should the young farmer form a limited liability company or another entity? Since this would be a startup, he wants to keep it simple and grow from there. In this situation, an LLC might be the best choice. When you start a business that you intend to keep separate from the farming operation, it is best to form a business entity. Iowa law does allow for a simple, low-cost LLC, or other entity formation with a few follow-up requirements such as online reporting.
The primary benefit of an entity, such as an LLC, is to limit your individual financial liability to the equity contributed to the entity. The LLC would act as a shield for the other aspects of your farming operation.
There is no “magic” or perfect entity. A farm family must look at the options and choose the best fit, gathering information from their legal, financial and tax advisers. Iowa law allows you to create entities such as a partnership, a C or S corporation, an LLC, or a limited liability partnership. There are nuances to each entity, but the reason for formation is typically to shield that business and keep it separate from other aspects of the farming operation.
While it is relatively “cheap” to set up an entity, you want to make sure to examine the goals of the operation with your trusted advisers, including your attorney and tax consultant. Drafting a good operating agreement is key to the success of this arrangement and the entity’s operation, especially if others are involved.