TAX PLANNING FOR MARRIED COUPLES

1. Tax-Sensitive Estate Planning In 2013 and Beyond: Lots to Think About!Presented byPaul P. Morfpmorf@simmonsperrine.com(319)896 4012

2. TAX PLANNING FOR MARRIED COUPLES

3. “Married Couple” • “Married Couples” now includes Same-Sex Couples for all state and federal purposes if the Couple Resides in Iowa. • Couple must be married in a state that recognizes same-sex marriage, such as Iowa • Once married, federal marital rights follow the couple even if they move to a state that doesn’t recognize same-sex marriage. • See Rev. Rul. 2013-17 and Windsor decision

4. TAX PLANNING FOR MARRIED COUPLES NOTABLE DEVELOPMENTS • Portability “permanent” • Higher Exemptions “permanent” • Income Tax and Capital Gains Tax Rates Getting Closer to Estate and Gift Tax Rates • Uncertainty Regarding Federal Status of Same-Sex Marriage

5. The Estate and Gift Tax in 2013 and Beyond • No Sunset • Permanent until Congress votes to change it • Rate Unified at 40% (gift, estate, GST) • Exemptions are Indexed to Inflation • $5,000,000 in 2011 • $5,125,000 in 2012 • $5,250,000 in 2013 • Increase for 2014 may be about $90,000

6. The Estate and Gift Tax in 2013 and Beyond • Estate and Gift Tax Exemptions are Portable • GST Exemption is Not Portable • Must File an Estate Tax Return to Elect Portability • Must be timely, but relief may be available if a deadline is blown. • Should all decedents with surviving spouses be filing estate taxes? • Malpractice concerns?

7. The Estate and Gift Tax in 2013 and Beyond • A great improvement for Doctors and Professors with large qualified plans: Now you can have a Spousal Roll-Over Without Wasting Estate Tax Exemption • Consider the Physician with a $7,000,000 IRA and no other assets. • Previously, he had to choose between a spousal roll-over and sound income tax planning vs. a credit shelter trust and good estate tax planning. Now he can name optimize both by naming the Spouse as beneficiary, if she files a federal estate tax return and does a spousal roll-over. • This is a game-changer for people in that situation. • But GST Tax Exemption is not Portable.

8. The Estate and Gift Tax in 2013 and Beyond • Allows Most “ordinary folks” to Simplify Their Plans • Beaver Cleaver Family • No Non-Tax Reasons for a Trust • Not Likely to Have Assets Exceeding $10,000,000 adjusted for inflation • Outright Marital Bequest is Now a Fine Option • Back-stopped by a Disclaimer to a Family (Bypass) Trust

9. Estate Tax Freeze, or Second Step-Up in Basis? • “Disclaimer-Based Contingent-Tax-Planning Will Be Optimal for Many or Most “First Marriage” Clients With Under $10,000,000. • “I leave everything to my Spouse; What She Disclaims I leave to the Credit-Shelter (Bypass) Trust.” • Allows Flexibility for Post-Mortem Planning • Disclaim to Fund the Trust and Get an Estate Tax Freeze? Or Spouse to Receive Assets and Get a Second Step-up? • Either way, no estate tax exemption is wasted. • For families well below the $10,250,000 threshold, the second step-up in basis will often be optimal • For folks approaching $10,250,000, the estate tax freeze may be attractive, especially with appreciating assets (farms) that are not likely to be sold by heirs but rather retained as legacy assets.

10. Disclaimer-Based Plans Allow Post-Death Flexibility: Disclaim to Fund the Trust and Get an Estate Tax Freeze? Or Spouse to Receive Assets and Get a Second Step-up? • Either way, no estate tax exemption is wasted. • For families well below the $10,250,000 threshold, the second step-up in basis will often be optimal • For folks approaching $10,250,000, the estate tax freeze may be attractive, especially with appreciating assets (farms) that are not likely to be sold by heirs but rather retained as legacy assets.

11. What if I want a Trust: • GST Tax Exemption is Not Portable • Protect Children’s Inheritance • Avoid Creditors, Predators, and Future Paramours of my Spouse and Kids • Ensure Oversight of Financial Decisions if Spouse is Not Sophisticated Is a QTIPable Trust allowing a fractional QTIP election the optimal resolution?

12. Rev. Proc. 2001-38, 2001-24 I.R.B. 1335 • A savings provision • Intended to save taxpayers from unnecessary QTIP elections made in error • Could possibly be applied to void QTIP elections made for basis planning purposes rather than to avoid estate taxes at first spouse’s death • ACTEC and ABA may seek clarification • Until clarification is given, caution should be used in drafting plans that will utilize QTIP elections to maximize step-up in basis at the second spouse’s death.

13. Why Use a Credit-Shelter Trust? • Ensures no Waste of Exemption • No “Election” Need be Filed within 9 months as with Portability: Less room for user error to result in lost exemption. • Congress Could Change the Law • See President Obama’s 2013 Budget, calling for exemptions to fall and rates to rise in 2018. • A bird in the hand is worth two in the bush • Obtains an Estate Freeze • (future income and appreciation on trust assets not subject to estate tax) • A second step-up may be less valuable where assets are not appreciating or where second spouse has a short life expectancy.

14. Why Use a Credit-Shelter Trust? • Second Step-Up is Less of a Concern to Some than Second Spouse. • There are Many Non-Tax Reasons for Trusts • Protect children’s inheritance from Surviving Spouse’s second family, creditors, • elder abuse. • A QTIP trust is sometimes an imperfect substitute: It cannot have a spray power among beneficiaries, and it must require that all income goes to the spouse for life.

15. My “new favorite” Trust term for married couples • Grantor and Grantor’s Spouse have discussed the importance of protecting our assets in the event of the remarriage of Grantor’s Spouse following Grantor’s death.  If Grantor’s Spouse chooses to remarry following Grantor’s death, then in order for Grantor’s Spouse to continue to be eligible to receive distributions of principal from the Marital Trusts pursuant to this Subsection 7.1.5, Grantor’s Spouse shall execute a valid premarital agreement not less than fifteen (15) days prior to the time of the remarriage that complies with the following terms. 

16. My “new favorite” Trust term for married couples • The premarital agreement must be in writing and signed by Grantor’s Spouse and Grantor’s Spouse’s fiancé with each having been represented by independent legal counsel.  Prior to the execution of the agreement, each party must make full and reasonable disclosure of their assets as they exist at that time.

17. My “new favorite” Trust term for married couples • The premarital agreement must provide that Grantor’s Spouse’s fiancé waives any right to any portion of Grantor‘s Spouse’s share of Grantor’s Spouse’s premarital assets and of Grantor’s Spouse’s share of or interest in any Trust (or Sub-Trust) created hereunder in the event of the dissolution of the marriage, or in the event the new spouse survives Grantor’s Spouse.

18. My “new favorite” Trust term for married couples • If Grantor’s Spouse fails to obtain a premarital agreement according to the terms set forth in this Subsection, then upon the remarriage of Grantor’s Spouse, Grantor’s Spouse shall no longer be eligible to receive distributions of the principal of the Marital Trusts pursuant to this Subsection 7.1.5.

19. Conclusion: A/B Plans with Marital Trusts and Family Trusts Will Still be Important Where Trusts are Desired for Non-Tax Reasons • “Largest Tax-Free Amount to the Family Trust, Rest to the Marital Trust” • Family Trust can favor spouse but have a spray power, can accumulate income Spouse doesn’t need; • Protect assets from your surviving spouse’s “second family” and creditors” • Avoids Waste of Exemption and Maximizes Estate Tax Freeze When First Spouse Dies (future appreciation and income on Family Trust will not be subject to estate tax when second spouse dies) • But an “Optimal Marital Deduction” Formula may not fully take advantage of the opportunity for a step-up in basis upon the second spouse’s death. • Some have suggested a Clayton QTIP or Fractional QTIP Trust to solve this problem, but (1) there is a lack of certainty as to whether a QTIP election will be recognized by the service where it is not necessary to avoid estate taxes, and (2) it is potentially problematic having a spouse as trustee making a fractional QTIP election in a Clayton QTIP situation (where the QTIP portion is held on different terms than the non-QTIP portion).

20. Having Your Cake and Eating it Too With a Credit Shelter Trust? • Some have giving an independent 3rd party the power to bring Family Trust assets back into the Spouse’s estate to receive a step-up in basis at death if estate taxation will not be a problem: • Allow them to give the Spouse a general power of appointment over a portion of the trust assets at her death • Allow an independent trustee to distribute assets to the Spouse from the Family Trust for any purpose, including to facilitate a step-up at death • These options, of course, undermine at least somewhat the non-tax reasons for using a Family Trust, as they expose the assets to the Spouse’s creditors. • Of course, this is less optimal than portability for couples approaching the $10,250,000 limit, as the same property ends up using Estate Tax exemption twice, potentially. But for less wealthy families, it may be a good compromise.

21. Outright Marital Followed by Inter Vivos Trust Created by Surviving Spouse • More Potential Leverage Than With Testamentary Trust • Inter Vivos Trust Could be a Grantor Trust • Spouse pays tax on kids’ income • Additional assets could also be loaned/sold to trust • Potential for Second Step-up if spouse buys assets back • No Expenses or Taxes Paid from Credit Shelter Trust with After-Tax Dollars • BUT: • There’s Many a Slip from Cup to Lip. • Future of Grantor Trusts Uncertain • Spouse May Change His/Her Mind. • Congress may curtail use of Grantor Trusts • GST Tax exemption is not Portable

22. In Summary: • Where there is no non-tax reason for a trust, an outright marital bequest of the residue with a power to disclaim to a Family Trust is optimal for most families who are well under $10,000,000, at least where Generation-Skipping Transfer Tax Planning is not anticipated. • A fractional QTIP Trust might be optimal in other situations, if Rev. Proc 2001-38 turns out not to be a problem. • Clayton QTIP elections would be particularly helpful, but an independent trustee should usually make that election in situations where estate or gift taxation could possibly be an issue. • Leaving the Tax-Free Amount to a Bypass Trust and the excess to a Marital Trust is still a fine plan in many cases, but attorneys should disclose that some opportunity for a stepped-up basis is being left on the table with this option. • With qualified plans and IRAs, outright bequests to spouse to allow a spousal roll-over is more optimal than ever, as it no longer wastes exemption.

23. Equalizing Assets Between Spouses a Bad Idea? • Equalizing assets between spouses for tax planning purposes seems much less important in an era of portability, absent GST-Tax Planning. • In light of the recent Frye and Myers decisions of the Iowa courts, beware having clients move assets back and forth, or even into revocable trusts, without disclosing to them that they may be impacting their spousal share rights. • If my spouse signs off on a deed funding my revocable trust, she loses her spousal share in that real estate under new appellate case law (Frye). • By putting my assets in POD/TOD form, I cut off my spouse’s marital share rights, according to a new Iowa Supreme Court decision (Myers).

24. The Spousal Share Under Iowa Law

25. Iowa Code Section 633.238 – Elective Share of Surviving Spouse 1. The elective share of the surviving spouse shall be limited to all of the following: • One-third in valueof all the legal or equitable estates in real property possessed by the decedent at any time during the marriage which have not been sold on execution or other judicial sale, and to which the surviving spouse has made no express written relinquishment of right. THIS IS WHY SPOUSES HAVE TO SIGN OFF ON REAL ESTATE DEEDS EVEN WHEN THEY HAVE NO OWNERSHIP THIS IS “DOWER” and “CURTESY”

26. Iowa Code Section 633.238 – Elective Share of Surviving Spouse – Continued 1. The elective share of the surviving spouse shall be limited to all of the following: b. All personal property that, at the time of death, was in the hands of the decedent as the head of a family, exempt from execution. What about IRAs? District Court case (Rich) says yes, exempt from execution. Myers may mean that IRAs are not “personal property,” at least if the beneficiary is not a revocable trust or will.

27. Iowa Code Section 633.238 – Elective Share of Surviving Spouse – Continued 1. The elective share of the surviving spouse shall be limited to all of the following: c. One-third of all personal property of the decedent that is not necessary for the payment of debts and charges. Is there any kind of property other than real property and personal property? Is personal property that passes by beneficiary designation personal property “of the decedent? Sieh (no longer good law) Myers (holding Sieh was abrogated by statute) What about property that passes by beneficiary designation to a revocable trust or to an estate?

28. Iowa Code Section 633.238 – Elective Share of Surviving Spouse – Continued 1. The elective share of the surviving spouse shall be limited to all of the following: d. One-third in value of the property held in trust not necessary for the payment of debts and charges over which the decedent was a grantor and retained at the time of death the power to alter, amend, or revoke the trust, or over which the decedent waived or rescinded any such power within one year of the date of death, and to which the surviving spouse has not made any express written relinquishment. -What about deeds used to fund revocable trusts? -What if the deed includes language waiving dower and curtesy? See Frye.

29. Iowa Code Section 633.238 – Elective Share of Surviving Spouse – Continued 2. The elective share described in this section shall be in lieu of any property the spouse would otherwise receive under the last will and testament of the decedent, through intestacy, or under the terms of a revocable trust. -doesn’t mention beneficiary property -doesn’t mention joint tenancy property What about property that passes by beneficiary designation to a revocable trust or to an estate?

30. Cases Preceding Estate of Myers Sieh v. Sieh: • Facts - In Sieh, Edward Sieh became deceased and left considerable assets at his death in a revocable inter vivos trust. On May 19, 1992, Edward had created a revocable inter vivos trust, which he funded with all of his personal effects, furniture, appliances, vehicles, tools, and shop equipment. At the time the trust was created, Edward was unmarried. The beneficiaries of the trust were Edward’s son and daughter. On December 23, 1992, Edward transferred a substantial amount of Grundy County farmland, which was owned by him, to the trust. On June 21, 1998, Edward married Mary Jane, and they remained married until his death on September 25, 2003. Edward’s Will was admitted to probate without present administration and a Notice to Creditors was published in the local newspaper, with a copy of the Notice being mailed to Mary Jane, the surviving spouse of Edward. • Mary Jane filed a Spousal Election against the Will. Mary Jane then sought a Declaratory Decree in probate establishing the assets of the revocable trust should be included in her statutory share. • The District Court ultimately entered summary judgment against Mary Jane, and she appealed.

31. Cases Preceding Estate of Myers - Continued Sieh v. Sieh, 713 N.W.2d 194, 198 (Iowa 2006) abrogated by statute as recognized in In re Estate of Myers, 825 N.W.2d 1 (Iowa 2012). • Change to Elective Share - Interestingly, in 2005, while the appeal was pending with the Iowa Supreme Court, the Iowa Legislature amended the Spousal Elective Share under Iowa Code section 633.238 to add subsection (1)(d) to apply to trusts. • On March 17, 2006, the Iowa Supreme Court filed its opinion and reversed the Iowa District Court’s summary judgment ruling against the surviving spouse. • Holding: “In the present case, the decedent had complete control over the trust assets at all times prior to his death. Under the position adopted by the American Law Institute in the Restatements to which we have referred, that fact would allow the assets in the revocable trust to be included in the statutory share of Edward's spouse electing against the will. We adopt the view of the American Law Institute on this issue. Although Edward very likely did not intend for Mary Jane to share in any of the trust assets, we are satisfied that this is her right by reason of section 633.238.” • Spouse should be treated no worse than a general creditor • Personal Property of the Decedent means property Owned or Owned in Substance by the Decedent on the eve of death. (citing Restatement)

32. Cases Preceding Estate of Myers - Continued Other Cases: • In Rich v. Rich (Case No. EQCV 141699), the surviving spouse and decedent had married on August 11, 1971, and at the time of their marriage, each party had children of a prior marriage. No children were born of the marriage between the surviving spouse and decedent. In 1971, the parties executed Wills naming each other as executors and beneficiaries of their respective Wills. In 1992, unbeknownst to the surviving spouse, the Decedent executed a Revocable Trust and a new Will, which contained pour-over provisions to the Trust, but the Decedent failed to fund the Trust during his lifetime. Upon the decedent’s death, the surviving spouse discovered her husband’s new estate plan and ultimately elected against the Will. At issue was whether the elective share should include exempt personal property which included an IRA with beneficiary designation to the Trust and POD accounts payable to children. The Woodbury County District Court held that the surviving spouse was entitled to include such assets in the elective share calculation. Since the IRA was exempt, the Court held that her share of the IRA was 100%.

33. Cases Preceding Estate of Myers - Continued • In Re Estate of Albers ((Pottawattamie County). District Court held that the surviving spouse’s elective share does not include POD or TOD accounts. • In re Estate of Dunn (Johnson County) District Court held that the surviving spouse’s elective share does not include POD or TOD accounts (appeal mooted by Myers decision and dismissed prior to briefing).

34. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) Facts of Case: • Decedent died on November 2, 2009, and was survived by her husband, Howard. • At the time of Decedent’s death, she owned a number of assets, either jointly or individually, which were valued at approximately $479,989.29. • Of Decedents’ various assets, Howard became the sole owner of the jointly owned real estate through his rights of survivorship. Decedent left no other property in her Will to her husband, other than some household furnishings, and bequeathed the rest of her property to her daughters and stepson.

35. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued Facts of Case: • Three assets were at issue in the case, a checking account, a certificate of deposit, and an annuity, all of which were accompanied by beneficiary designations payable on death to Decedent’s daughters. • A probate was opened for Decedent’s estate, Decedent’s brother was appointed Executor, and Howard filed a Spousal Election.

36. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued District Court Decision: • The Court was asked to determine whether the checking account, certificate of deposit, and annuity should be included in Howard’s elective share calculation given each had a POD designation. • The District Court relied on the Sieh (713 N.W.2d 194) decision and concluded “‘the decedent had complete control over the trust assets at all times prior to his death’ . . . Karen retained control over the POD assets before her death and thus, . . . these assets, like the assets of a revocable trust, should be included in Howard’s elective share.”

37. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued Supreme Court Decision– Noting Legislative Abrogation of Sieh: • In discussing the Sieh decision, the Court determined that that case held that section 633.238 “could be read more expansively”; however, the Court also addressed the general assembly’s amendments to 633.238 in 2009 wherein the words “limited to” were added to the statute. • The Supreme Court noted that the post-amendment version of 633.238 states that the “elective share of the surviving spouse shall be limited to all of the following” and “[i]is clear that the legislature, by this language, intended to limit the property that would be included in the surviving spouse's elective share to the four categories of property specifically identified in the statute.”

38. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued Supreme Court Decision– Noting Legislative Abrogation of Sieh: • The Supreme Court further stated that the surviving spouse’s “interpretation is consistent with the general assembly's explanation accompanying the House version of the bill” which stated “[t]he bill limits the elective share of the surviving spouse who elects to take against a decedent's will to the elective share portions contained in Code section 633.238 and does not include nonprobate or nontrust assets.” • Based upon the legislature’s 2009 amendment, the Supreme Court opined that Sieh was abrogated in part and that “the elective share is limited to those assets specifically enumerated in section 633.238(1) and cannot be judicially expanded.”

39. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued Supreme Court Findings – POD Assets under 633.238: • The surviving spouse’s assignees claimed that the POD assets fell within 633.238(1)(c) (personal property of the decedent), but the Supreme Court opined that “POD assets are not included in the surviving spouse's elective share under section 633.238(1)(c).” • The Court stated: “POD accounts, such as the checking and certificate of deposit accounts here, and annuities are nonprobate assets. Nonprobate assets are interests in property that pass outside of the decedent's probate estate to a designated beneficiary upon the decedent's death. Although these assets are the personal property of the grantor before death, they become the personal property of the designated beneficiaries upon the grantor's death pursuant to a contract between the grantor and the administrator of the account….” • By Judicial Gloss, Then, “Personal Property of the Decedent” is limited to “Personal Property passing under will or under revocable trust. • What if the beneficiary is the revocable trust? • What if the beneficiary is the Family Trust created under the Revocable Trust? • What if the beneficiary is the revocable trust, but the trustee disclaims? • Breach of fiduciary duty of impartiality?

40. Estate of Myers, 825 N.W. 2d 1 (Iowa 2012) - Continued Ramifications of Estate of Myers: • While the Myers decision only addressed POD assets in the Decedent’s estate, the ramifications of the statute are much broader. • The Supreme Court adamantly stated that the Spousal Elective Share applies to probate assets and is inapplicable to non-probate assets and thus allowing Executors in all sorts of various non-probate asset situations to preclude the surviving spouse’s elective share claim against non-probate assets. • Leads to Strange Results. Example 1: Consider a deceased spouse with a $1,000,000 IRA and a $200,000 in probate property • 1. If spouse gets $1,000,000 IRA, she can still claim 1/3rd of probate estate of $200,000. • 2. If the IRA is designated to children, spouse may only receive 1/3rd of the probate property • 3. Surviving spouse can be entirely disinherited if the property is put in POD form. Example 2: Consider deceased spouse with $2,000,000 in Iowa real estate 1. No ability to avoid spousal share on this property, without spousal waiver. 2. Funding revocable trust or LLC could be an “unwitting” spousal waiver.

41. Moral of the Story of Myers • If you are a gold-digger, marry someone with land, not with a big IRA • While You Can’t do a Consensual Post-Marital Agreement in Iowa, You Can Secretly and Slyly Disinherit Your Spouse by using POD/TOD and Jt. Property Arrangements in Iowa, at least with respect to Personal Property. • If you fear your spouse may disinherit you (or that your spouse’s POA or Trustee may try to do so when your spouse is old and frail) be careful what you sign to allow funding of LLCs and Revocable Trusts • Attorneys should consider conflicts of interests and CYA letter practices anew when representing married couples. • Iowa Needs Legislation in this area (the Court in Myers all but called for it).

42. Estate of Frye, 2012 Iowa App. LEXIS 950 Facts of Case: • This case involves the language contained in a Warranty Deed, a revocable trust, and a spouse’s waiver of her elective share rights. • In 1974, the Decedent married Maria (his 2nd marriage and her 1st marriage). At the time of the marriage, Decedent had children from his first marriage. • On June 22, 2007, Decedent created a revocable inter vivos trust with his children as beneficiaries. • On June 26, 2007, Decedent and his wife executed a Warranty Deed transferring 5 parcels of real property into the Trust. • Four of the parcels had been in Decedent’s name alone, and one parcel was held in joint tenancy with the spouse with right of survivorship. • The Warranty Deed contained the following provision: “Each of the undersigned hereby relinquishes all rights of dower, homestead, and distribute share in and to the real estate.” It should be noted that this language is pre-printed on the Iowa Docs form Warranty Deeds.

43. Estate of Frye, 2012 Iowa App. LEXIS 950 - Continued Facts of Case: • In November 2008, Decedent died and his Will was admitted to probate. • Lincoln Savings Bank, as wife’s guardian and conservator, filed a Spousal Election. • The Executors filed a Petition for Declaratory Judgment alleging that the surviving spouse was not entitled to take an election against the real property based upon the deed language relinquishing her rights in the property.

44. Estate of Frye, 2012 Iowa App. LEXIS 950 - Continued District Court Findings: • The District Court concluded that “[s]aid deed does not relinquish any rights to the elective share pursuant to 633.238, and she is therefore entitled to one-third in value of all the legal or equitable estates in real estate possessed by Decedent at any time during the marriage including that real estate contained in the Decedent’s living trust dated June 22, 2007.” • On appeal, the Iowa Supreme Court disagreed and reversed.

45. Estate of Frye, 2012 Iowa App. LEXIS 950 - Continued Iowa Supreme Court Findings: • On appeal, the sole issue was whether the warranty deed language (“all rights of dower, homestead and distribute share in and to the real estate”) qualifies as an “express written relinquishment” under Iowa Code section 633.238(1). • Under Iowa Code section 633.238(1)(a), the elective share is limited to one-third (1/3) in value of “all the legal or equitable estates in real property possessed by the decedent at any time during the marriage which have not been sold on execution or other judicial sale, and to which the surviving spouse has made no express written relinquishment of right.” • Furthermore, section 633.238(1)(d) provides that the elective share is limited to one-third (1/3) in value “of the property held in trust not necessary for the payment of debts and charges over which the decedent was a grantor and retained at the time of death the power to alter, amend, or revoke the trust, or over which the decedent waived or rescinded any such power within one year of the date of death, and to which the surviving spouse has not made any express written relinquishment.”

46. Estate of Frye, 2012 Iowa App. LEXIS 950 - Continued Iowa Supreme Court Findings: • The Court noted that the statutory language: “reveals subtle, but significant differences in how the legislature expressed the waiver requirement in paragraph (a) and the new paragraph (d). Paragraph (a), specifically addressing real property, requires an ‘express written relinquishment of right.’ Standard warranty deeds, such as the one used in this case, provide an express written relinquishment of ‘all rights of dower, homestead and distributive share in and to the real estate.’ In contrast, paragraph (d) only requires a spouse to make "any express written relinquishment" of the property held in the revocable trust. The legislature could have used the identical language in paragraph (d) it used in paragraph (a) or it used in Iowa Code section 633.211 defining the spousal elective share for surviving spouses of intestate decedents. Instead, the legislature chose not to require a relinquishment of right concerning the surviving spouse's dower rights, but merely to require a surviving spouse to make any express written relinquishment of the property.”

47. Estate of Frye, 2012 Iowa App. LEXIS 950 - Continued Iowa Supreme Court Findings: • “Having a different relinquishment requirement was both purposeful and necessary. Had the legislature used identical language in both paragraph (a) and (d), the new paragraph would not have provided an effective way for spouses to use revocable trusts in estate planning. Trustors and their revocable trusts are often considered the functional equivalent of each other. Any property placed in a revocable trust would still be ‘owned in substance’ by the trustor. When spouses attempt to waive their dower interest in property placed in a trust, such interest would automatically reattach to the asset because the revocable trust was the alter ego of the trustor. The legislature, in paragraph (d), made a policy choice to define a spouse's elective share in revocable trust assets so that dower rights would not reattach after the transfer of the property into a trust if the spouse made an express written relinquishment of the property. The legislature did not require any ‘magic formula’ for relinquishment; any express written relinquishment of the property is sufficient.” • The Iowa Supreme Court opined that “the language in the warranty deed executed by the Fryes satisfies the express written relinquishment requirement of section 633.238(1)(d). The property conveyed to the trust by the warranty deed is not subject to the surviving spouse's elective share.”

48. PROPOSED LEGISLATIVE RESPONSE TO FRYE • The following legislative change to section 633.238(1)(d) is being studied by the leadership of the Iowa Academy of Trust and Estate Counsel. It has not yet been taken to the legislature: • 1. The elective share of the surviving spouse shall be limited to all of the following: • d. One-third in value of the property held in trust not necessary for the payment of debts and charges over which the decedent was a grantor and retained at the time of death the power to alter, amend, or revoke the trust, or over which the decedent waived or rescinded any such power within one year of the date of death, and to which the surviving spouse has not made any express written relinquishment. A deed signed by the surviving spouse for the purpose of conveying real property to a trust shall be an express written relinquishment of the real property under subparagraph (a) above but shall not be deemed a relinquishment of the value of the real property in the trust unless the surviving spouse specifically states an intent to relinquish the value in the deed.  Effective Date: This proposed change should be made retroactive.

49. COMMENTS to IATEC DRAFT PROPOSAL TO ABROGATE FRYE RETROACTIVELY: • Paragraph 1(d) was added to this code section in 2005 to clarify that assets held in a revocable trust were to be taken into account when calculating a surviving spouse’s elective share. At the time this legislation was discussed by the ISBA Probate Section, there was discussion on whether a spouse who joined in a deed transferring property into a Revocable Trust would be treated as having made an express written relinquishment under paragraph (d). It was the consensus of the Probate Section that when the spouse joined in a deed transferring property into a Revocable Trust, the spouse was relinquishing his/her right to claim a 1/3 share in the actual piece of real estate under paragraph 1(a), but was not relinquishing his/her right to claim a 1/3 share of the value of the real estate owned by the Trust under paragraph 1(d).

50. COMMENTS TO IATEC DRAFT PROPOSAL TO ABROGATE FRYE RETROACTIVELY: • For the past 7+ years, practitioners have asked spouses to join in deeds transferring property to Revocable Trusts without advising the spouse that they might be waiving their right to claim the value of the real estate as part of their 1/3 spousal elective share in the future. The decision by the Iowa Court of Appeals is problematic for the following reasons: • It conflicts with the purpose for adding subparagraph (d) to the Code; • It conflicts with other rulings of the Court which prohibit spouses from entering into post-nuptial agreements; • It conflicts with practitioners’ interpretation of the Code and exposes practitioners to potential malpractice liability. • The proposed change to subparagraph (d) has been made in an effort to reverse the decision in the Frye case.