July 19, 2023
Trusts are a common topic we receive questions on from readers. The topic can create confusion because there are so many different types of trusts — from marital trusts to revocable trusts to irrevocable trusts. Let’s shed some light on the different uses of trusts and present some practical tips for how to use them.
In Iowa, the law of trusts is governed by the Iowa Trust Code (Iowa Code Ch. 633A) and the law that has been developed by the courts in numerous cases over the years. The law addresses the different types of trusts allowed under Iowa law, how to administer them, how to make changes, and how to act as a trustee, among other things. There are many reasons for establishing trusts in Iowa. Here are some of the questions we received and my answers and thoughts.
What are the most common types of trust in Iowa? We are interested in utilizing trusts in our estate planning. One of the most common types of trusts is the revocable trust, oftentimes referred to as a “living trust.” One of the main benefits of trust planning is that probate may be avoided if the trust has been set up and properly funded and assets retitled appropriately. A revocable trust can also be amended, changed or revoked at any time during the life of the grantor of the trust. Revocable trusts are also confidential and, if properly drafted, can help avoid potential family conflicts.
Revocable trusts are often confused with irrevocable trusts. Irrevocable trusts are less common and often used to hold an asset that has been gifted for purposes of federal estate and gift tax. They may also be used to hold life insurance policies that are meant to be kept separate from a person’s estate. An irrevocable trust typically cannot be changed or amended or revoked without court and beneficiary approval.
Another common type of trust is a testamentary trust. These trusts are established after a person’s death, and usually the terms are laid out in a person’s will. One example is a family trust or marital (spousal) trust. Typically, these trusts are used to protect the assets of the first spouse to pass and keep them separate from the surviving spouse’s estate. The spouse or family is usually entitled to income and sometimes principal, and may be set up for tax purposes.
Testamentary trusts may also be used to place restrictions on specific assets, like land or a business, to ensure the land will continue to be held or the business continue. A special needs or supplemental needs trust may also be set forth in a person’s will to establish a trust after death for the benefit of someone who needs a monthly supplemental but qualifies for government assistance due to a disability or other issue.
I am a trustee of a trust created under the will of my mother, which was established after her passing in 2010. My siblings and I are the beneficiaries, and I am the trustee. The only asset of the trust is farmland. I have one sibling who has rented the farm since 2010, and I have one sibling who thinks the rent charged to my farming sibling is unfair. What are my rights as a trustee? Trustees typically have broad authority under Iowa law. As long as the trustee is following the directions laid out in the trust and being a good fiduciary, their discretion is typically broad. Under Iowa law, a trustee must make prudent investments, be loyal and impartial. As a trustee, it is important to keep records and treat all beneficiaries with loyalty. As long as the rental rate is fair and complies with the language of the trust, you should be able to keep renting to the sibling. If the rent is well-below fair market value, you may be violating your obligation to the other beneficiaries if there is not specific language in the trust allowing for a discount. As we all know, family situations can be difficult if you don’t communicate. The best strategy is to meet at least annually and provide documentation to the beneficiaries.
What is a charitable remainder trust? I am hearing more talk about these trusts with the rise in interest rates, and my accountant suggested I look into these trusts as I am liquidating my farm operation and I have no heirs. I am charitably inclined, but I do need an income stream during my life. Can you tell me about these trusts? A charitable remainder trust is a type of trust that will ultimately provide the charity or charities of your choosing a significant gift after a period of time or upon the death of the grantors of that trust. The first step is to work with your financial adviser, accountant and/or attorney to run the numbers and see if this option makes sense. If it does, the attorney creates the trust and the assets are gifted to it. After the trust receives the assets (land, equipment, grain, livestock, etc.), the trust sells the assets, and there is no tax incurred at that point because the trust is charitable. So, the CRT may reinvest the full value of the sales proceeds. There are two types of CRTs: a charitable remainder unitrust, or “CRUT,” where the donor gets paid a percentage of assets in trust; and a charitable remainder unitrust, or “CRAT,” where the donor’s payments are fixed. Your advisers can help you decide which option is best for you. They also avoid Social Security tax on the self-employment income from the crop sale. You can also change the charities you wish to benefit; just make sure that language is included in the terms of the trust.
Herbold-Swalwell is with Parker & Geadelmann PLLC. Email her at [email protected].
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