SIOUX CITY -- Nobody wants to think about dying and leaving all their valuable land and possessions behind, but it happens to everybody.
And while the deceased may no longer have to worry about the sibling disputes and lawyer-on-lawyer dogfights, the whole process can proceed a lot more smoothly with some proper estate planning.
There are a lot of questions to consider when planning an estate -- what can we do to minimize our tax burden? Will an heir get mad about how things are being divvied up? Do debts fly away to heaven along with the debtor?
The following is a Q&A with Dan Dykstra, a Sioux City attorney and partner with Heidman Law Firm. With decades of experience in wills, trusts and estate planning, the man has some choice guidance to offer. Danny DeVito's attorney character in "The War of the Roses" said it best: "When a man who makes $450 an hour wants to tell you something for free, you should listen."
Comments have been edited for clarity and length.
MD: What are some of the most common mistakes people make when setting up estates, trusts and wills?
DD: The biggest mistake they make is not doing any planning at all. By far, a majority of people don't have any kind of planning. And one of the reasons is because they say, 'I put my kid's name on this bank account,' or 'My wife and I own everything as joint tenancy' -- but we never know who's going to die first. And if something should happen to the both of us, then what happens to the kids, who's going to take care of the kids? So the biggest mistake is actually not doing any planning whatsoever.
I'd say that the second biggest mistake, quite honestly, is a lack of communication. And by that, I mean parents telling, especially adult children, what they're doing and why. People get expectations: If I'm an on-farm heir and I've worked with my folks for 50 years, I expect to get a little bit of that farm ground, maybe more than my other sibling who went and worked in Des Moines at an insurance company. And that's probably fair, and there's a difference between being fair and equal. We try to encourage people to be fair with their family. But if you don't tell people what you're doing, if you don't tell your children what you're doing and why, then they have a preconception as to what's going to happen when mom and dad die, and that's a big problem.
So I encourage people to tell their tell their children -- use it as what we call a 'teachable moment' to say, 'I've just updated my plan, one of the things we're doing is such and such, because of these things that have happened.' That way they don't get so terribly mad at each other, or at the attorney who drafted the documents.
MD: What typically happens when someone who has an estate dies unexpectedly, and leaves no planning, no will?
DD: In a case when there's been no planning whatsoever, the law has an order in which people can be appointed as the administrator. There's not an executor, because there's no will. Then the property goes by what we call 'intestate succession.' Every state has their own rules on intestate succession, but basically, if I am married and all my children are from that marriage, everything goes to the spouse. If there are children from a prior marriage then it starts getting split up between those children and between my current spouse, and if there is no spouse at all then they go find your nearest relative, be it a parent, grandparent, brother or sister, niece or nephew. Rarely does it end up just going to the state -- that fear really doesn't happen, because we can always find some relative. And trust me, when there's money to be had, the relatives will say, 'Here I am, I'm happy to take the money.'
MD: What kinds of taxes are levied, both in Iowa and at the federal level, on estates?
DD: One of the things that has caused people to not be planning is the fact that, under the new tax law, we have an incredibly large exemption for federal estate tax purposes. Each of us can die with $11.18 million, give it to whoever we want, and there's no federal estate tax. So if you're married, it's $22.4 million, which eliminates 99.9 percent of the people from even having to file. Last year there were only a couple thousand returns filed -- we did do a few of those. But very few people ever have to pay any federal estate tax.
From an Iowa death tax standpoint, Iowa has no tax at all for anything that goes to our spouse, or 'upstream' to parents, grandparents, or 'downstream' to children, grandchildren. So lineal ascendants and descendants pay no tax. Something goes to a brother or sister, niece or nephew, Iowa still has a little inheritance tax (of between seven and 12 percent).
There are a lot of people who die who've never been married or didn't have any children, and give it to some close family member, nieces and nephews, but you can end up paying quite a bit of tax under those circumstances. But, typically those people are very happy to see the bequest anyway, even if they've had some tax withheld.
One of the other new planning things we have under the law is what we call 'portability.' If I am married and if I die, I can give my exemption, my $11.2 million to my spouse, and she can hang onto that, and on her death, she has my $11.2 plus the exemption on her death. And hers would go up with inflation.
Our gift tax exemption, by the way, now is $15,000 per recipient. So you can give $15,000 to anybody you want, they don't have to report it, and you don't have to file any gift tax return
MD: Who needs to make a will? I'm 23 and worth negative money, do I need a will?
DD: This is the question: If you have a little bit of life insurance through your work, or that you have personally, dead you're worth more than you maybe if you're alive. And if you got killed in a car accident, there'd be a claim -- so then what happens to that?
Some people have no assets, typically because they have a couple of kids or something -- who's going to be the guardian of those kids? And oftentimes people have a substantial life insurance policy, and by that I mean a couple hundred thousand bucks maybe, that gets paid out if both the husband and wife are deceased, how is that money going to be administered? Typically we'd put it in a trust for the benefit of those kids. So children dictate the need for a plan.
But estate planning isn't just a will -- it's also doing a financial power of attorney and a medical power of attorney and those things, and it's important to do that while we're still competent to make those decisions.
MD: Is it possible to inherit debt? What happens when a piece of an estate has a large amount of debt attached to it?
DD: An estate becomes its own entity, and as an entity it is responsible for the debt and liabilities of the person who passed away. So it's like a little company, a little corporation. And so, unless a third party, a spouse, a kid, or somebody, signed on that debt with the person who died, the person who inherits the money does not get that debt. But that debt gets paid inside the estate.
Sometimes there can be an estate where there's not enough assets to pay the bills. And then the law sets up a pecking order of who gets paid first -- funeral expenses, court costs, last illness expenses and so forth get paid first, and then the general creditors get paid last. So it gets cleaned up, almost like a little bankruptcy.
Some of the assets, though, are exempt. Your home is an exempt asset -- and unless you voluntarily put a mortgage against it, that can go to a spouse. Retirement plans are typically exempt assets and those can be transferred without paying bills.
MD: Are there circumstances where it's advisable for an elderly person to transfer their properties to a relative?
DD: Most of the time when people start transferring assets, their fear is, they're going to run out of money or use all their money to pay the nursing home. Because nursing home expenses, or assisted living, are very expensive. That's going to run from $5,000 to $8,000 to $9,000 a month -- you can go through a lot of money in a hurry.
So people will sometimes try to get rid of all their assets so they can qualify for what's known as Title 19, which under the system pays for that nursing home. But there are a lot of rules, and one estate planning thing that we do is plan with people, what's the best way to preserve the family assets, and still take care of the spouse that's not in the nursing home, or alternatively if there's just one person left, how to preserve whatever assets might be appropriate for the family.
The law prohibits you from transferring assets and applying for Title 19 within five years of that transfer. So it's a five-year look back, which is quite a long time, because people normally think about this when they're 85. They don't think about it when they're 70. So it's sometimes very difficult to transfer those assets and then later on apply, there's just not enough time to get through that five years -- and five years of nursing home is quite a bit of money.
MD: I was under the impression that you transfer the property, and then you apply for benefits tomorrow.
DD: You could in the 1980s. When I started practicing law, we could, we could transfer today, apply tomorrow. Now, from a social responsibility standpoint -- we did it because that's what the law was, it wasn't against the law to do that -- it kind of reeks of taking advantage of the system. Because now the taxpayer's paying for you in the nursing home, and you just gave everything to the kids.