The Iowa Department of Revenue has had a long standing position that it will not accept Family Settlement Agreements to change the calculation of Iowa Inheritance Tax. The Department has always relied on the original Will or Trust to calculate the amount of inheritance tax owed to the State of Iowa. A recent Iowa Court of Appeals decision has changed the long standing policy regarding Family Settlement Agreements. Family Settlement Agreements arise in estates or trusts where the beneficiaries of the Estate or Trust agree to enter into an agreement to change how the assets of the Estate or Trust will be divided.
The Court of Appeals case involved a decedent who had executed a transfer on death beneficiary designation on his brokerage account naming his son as the primary beneficiary and his son’s wife as the contingent beneficiary. The son predeceased the decedent. The decedent’s Will named the children of the deceased son as the beneficiaries of the assets of the Estate. The beneficiaries under the Estate, which were the grandchildren of the decedent, filed an action seeking to void the transfer on death beneficiary designation claiming that the decedent was not competent at the time he executed the document. Said matter was settled by a Family Settlement Agreement whereby half of the TOD account was paid to the grandchildren of the decedent and half of the account was paid to the wife of the decedent’s son.
The Court reasoned that the transfer of death beneficiary designation was a contract and if the contract was found to be invalid, the assets of the brokerage account would pass to the grandchildren as an asset of the Estate. The Court ruled that the amounts received by the grandchildren should not be subject to inheritance tax liability. The Court went on to state that the Department of Revenue may not always be bound to family agreements and that the Department has an obligation to collect inheritance taxes on schemes to avoid paying taxes. The Court concluded that in the case before the Court, there was no evidence of a scheme to avoid taxes in that the Agreement was entered into by the parties in good faith. This decision is great news for probate lawyers in Iowa and for beneficiaries of estates or trusts who enter into Family Settlement Agreements.
By James D. Beatty