My Dad has some money in CDs. Initially, he had beneficiaries named on the CDs. The beneficiaries were my sister and I. His lawyer said that was ok, but he typically recommends against that because if one of us were to pass before my dad the other would be the sole beneficiary. My Dad does not want that, he wants that 1/2 to go to non surviving sibling's kids. Now he has removed the beneficiaries, but the issue is those CDs will go into probate as I understand it and are subject to lawyer fees.
Inheritance tax in Iowa
- Thread starter dmclone
- Start date
I thought the whole point of drafting a good will was that you would avoid probate court? Is that wrong?
Avoid taxes and fights as much as possible, still have the court to deal with. A trust will X the courts.
I used to think that too until my wife's mother passed. The will just gives the lawyer a road map on how to distribute assets that are part of probate. You need to take other actions to avoid probate and the lawyer fees associated with it.
This is a pretty common misconception.
Wills must be effectuated through a probate proceeding.
A revocable trust is a private document, you can think of it like a pretty fancy contract, which transfers your assets outside of probate altogether.
When you get a revocable trust, you also will execute what’s called a “pour over will.” That will basically says “anything that I didn’t already title in my trust shall be sent to my trust when I die.” In the ideal world, we never actually need to use that pour over will.. it’s basically a backup plan.
When you make the trust, you will retitle your assets to be in the name of your trust. If you do it properly, you file the will with the probate court basically like a “read only” doc, but there is no actual probate proceeding.
However, if you fail to title an asset into the name of the trust (or if it isn’t otherwise transferable on death outside probate, I.e., POD/TOD, vehicle registration, etc), you will have to open a probate proceeding to get the asset into the trust after your death.
If you only have a will, it is POSSIBLE to still avoid probate, but only if you can use a non-probate transfer for all of your assets.
Just like how the revocable trust is basically a fancy contract, your bank or brokerage accounts are also contracts which can provide for a non-probate transfer, typically by Pay On Death/Transfer On Death. Vehicles don’t need to be probated, there’s a separate system under the DOT for those transfers.
Generally speaking, if you have real estate, or if you have any concerns about control of the assets after your death (I.e., minor children, adult children with money issues, etc.), you will probably want a revocable trust.
Sorry I missed this earlier..
I think some other posters responded well.
Transferring the real estate as a gift (most of the time) ends up giving the transferee the transferor’s basis in the property, with some adjustments. (If the basis exceeds the fmv it gets a little more complicated… but this is pretty uncommon for real estate).
However, inherited property usually receives a step up in basis upon the death of the transferor to the FMV at the time of their death.
Whenever you realize gain on the property and have to pay cap gains tax, particularly for real estate, that can be a REALLY nasty hit, and almost always exceeds the current 6% inheritance tax hit (assuming you aren’t a spouse/lineal descendent).
Trying to transfer the property in life to avoid inheritance tax is ALMOST always worse than waiting for death to get the stepped up basis in the asset. I guess, there could in theory be some scenarios where it may be better to transfer the real estate in life as a gift.. but most retirees who are looking for a revocable trust have their homes they bought 30 years ago, which have tremendously appreciated. A cap gain hit upon sale will almost certainly be worse than any inheritance tax.
Look at any plat map. 80% or more of the land is being held by a trust or LLC
