Iowa Trust and Estate Update

The 2021 Iowa legislative session was an eventful one, and the Legislature made waves in two areas that may affect your estate planning. First, Iowa adopted, effective July 1, 2021, a new chapter to the Iowa Code, chapter 633F called the Iowa Uniform Custodial Trust Act. For anyone familiar with the Iowa Uniform Transfers to Minors Act, this new chapter allows for similar transfers to adults. Second, Iowa set up gradual repeal of the Iowa Inheritance Tax. Here are some short answers to questions we have heard about these two developments in Iowa law. 

I. What is the Iowa Uniform Custodial Trust Act?

The Act allows a person transferring property (the “transferor”) to another person (the “transferee”) to transfer the property in trust for a beneficiary instead of transferring the property outright to the beneficiary. Unlike when a person settles a formal trust agreement, which typically requires a written document executed with certain formalities, a “custodial trust” is formed by using special, statutorily-provided language as part of the documents used to make the transfer. The transferor will name in the transfer document (1) the property to be transferred, (2) the beneficiary of the custodial trust, (3) the trustee-transferee of the custodial trust who receives the property, and (4) the special language required by statute to create a custodial trust. 

A custodial trustee has all the rights and powers over custodial property that an unmarried adult owner would have and must exercise those powers for the benefit of the beneficiary of the custodial trust and in accordance with the directions of the beneficiary, if the beneficiary is not incapacitated. 

The Act is designed to be flexible and straightforward to use. For example, a custodial trust can be created to take effect upon a triggering event and can be included in a will, a formal trust, a multiple-party account, an insurance party, or in other contracts. However, the Act imposes limits on the creation of custodial trusts. For example, a custodial trust cannot have multiple beneficiaries and cannot be created with a transfer exceeding fifty thousand dollars without court approval. 

II. Why Does the Custodial Trust Act Matter to Me? 

The main benefit that the Act offers is flexibility, particularly when a person wants to transfer property for the benefit of an incapacitated beneficiary without opening a conservatorship for the incapacitated beneficiary. The Act includes directions and rules for how the custodial trusts should be administered for an incapacitated beneficiary. Avoiding the need for appointment of a conservator saves costs and loss of privacy associated with opening and administering a conservatorship in probate court. 

III. When is the Inheritance Tax repeal effective?

The Iowa Inheritance Tax is a tax imposed on transfers of property from an owner when the owner dies. There are several exemptions to the tax, such as an exemption for property passing to certain charities or to a decedent’s surviving spouse or lineal descendants. When an exemption is not applicable, such as a transfer from the decedent to a surviving sibling, the transfer is subject to tax. For example, a transfer from a decedent’s estate to a sibling of the decedent worth $200,000 would be taxed at 10%.

The Iowa Inheritance Tax will be phased out effective January 1, 2021. Starting in 2021, the tax rate is reduced by 20%, and each calendar year after 2021, the tax rate is reduced by an additional, cumulative 20% until the tax is eliminated for individuals who die in 2025. 

IV. How can I Learn More? 

Our attorneys have started integrating the Iowa Uniform Custodial Trust Act into our clients’ estate planning documents to provide additional flexibility and adaptability for their families. If this article has made you wonder whether your estate plan is up-to-date with recent law, how you can integrate the Iowa Uniform Custodial Trust Act into your estate plan, or sparked thoughts about how the Iowa Inheritance Tax repeal could open new estate planning possibilities for you, please contact us to discuss how we can help you accomplish your goals.