DON’T DARE READ THIS ALONE!
The Iowa estate planner dutifully gathered information about all of Count Dracula’s many assets. While discussing real estate holdings, however, the Iowa estate planner inexplicably failed to inquire as to whether Drac owned real estate with his wife, in any other states.
Yes, that’s right: the Iowa estate planner simply forgot to ask about other States, including community property states. This could, unfortunately, impact the effectiveness of the Drac’s will and the dispersion of Drac’s property.
[Angry mob shouts in disbelief]
Iowa is NOT a Community Property State
What are Community Property Laws?
Given our limited space I will only provide the most basic of oversimplifications. Simply put, states with community property follow a rule that all assets acquired during marriage are considered “community property.” While each community property state has its own unique and precise set of characterization rules, they all share the general rule that an asset acquired or given during marriage is presumed to be community property, until it is proven to be separate.
Marital property in community property states is owned by both spouses equally (50/50). Marital property includes earnings, all property bought with those earnings, and all debts accrued during the marriage. Community property begins as soon as the couple is married and ends when the couple physically separates with the intention of not continuing the marriage.
Spouses may not transfer, alter, or eliminate any whole piece of community property without the other spouse’s permission. A spouse can manage his or her own half the way he or she wishes, but the whole piece includes the other spouse’s one-half interest. In other words, a spouse cannot be alienated from his or her one half.
Death or Divorce in Community Property States
When one spouse passes away, half of the community property passes to the surviving spouse. Their separate property can be devised to whomever they wish according to their will, or via intestacy statutes without a will. Many community property states offer an interest called “community property with the right of survivorship.” Under this doctrine, if a couple holds title or deed to a piece of property (usually a home), then upon a spouse’s death the title passes automatically to the surviving spouse and avoids probate court proceedings.
If the couple divorces or obtains a legal separation, all of the community property is divided evenly (50/50). The separate property of each spouse is distributed to the spouse who owns it and is not divided according to the 50/50 rule (but, again, there is a presumption that all property is community property, not separate property).
Sometimes, economic circumstances warrant awarding certain assets wholly to one spouse, but each spouse still ends up with 50 percent of all community property in terms of total economic value. This is most common regarding marital homes. Since it is not a practical idea to try to divide a house in half, often the court will award one spouse the house, while the other spouse receives other assets with a value equal to half the value of the home.
There are exceptions to the equal division rule. The most common and well-known thanks to popular culture is a prenuptial agreement. Before the marriage, the couple may enter into such an agreement that lays out how the marital property shall be divided upon divorce.
Which States have Community Property Laws?
Eight states are considered to be the “traditional community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Wisconsin is the functional equivalent of a community property state when it adopted the Uniform Marital Property Act in the 1980s. Alaska and Tennessee are elective community property states, meaning spouses may create community property by entering into a community property trust or agreement.
What About all the Other States?
The other states, the clear majority of states, are called “common law property” states. “ In this case, “common law” is simply a term used to determine the ownership of property acquired during the marriage. The common law system provides that property acquired by one member of a married couple is owned completely and solely by that person. Of course, if the title or deed to a piece of property is put in the names of both spouses, then that property would belong to both spouses. If both spouses’ names are on the title, each owns a one-half interest.
Death or Divorce in Common Law Property States
When one spouse passes away, his or her separate property is distributed according to his or her will, or according to intestacy laws without a will. The distribution of marital property depends on how the spouse’s share ownership—the type of ownership.
If spouses own property in “joint tenancy with the right of survivorship” or “tenancy by the entirety,” the property goes to the surviving spouse. This right is actually independent of what the deceased spouse’s will says. However, if the property was owned as “tenancy in common,” then the property can go to someone other than the surviving spouse, per the deceased spouse’s will. Of course, not all property has a title or deed. In such cases, generally, whoever paid for the property or received it as a gift owns it.
If the couple divorces, or obtains a legal separation, the court will decide how the marital property will be divided. Of course, just as in community property states, the prenuptial agreement is an option. The couple can enter into agreement before marriage, providing how to divide marital property upon divorce.
Why did the Iowa Estate Planner Forget to Inquire About Real Estate Located in Other States?
Some say evil men were born that way, while others say monsters learn evil. We can only guess. All we can know for sure is that the Iowa Estate Planner didn’t ask about real estate in other states. And that was terrible.
You Said Iowa Wasn’t a Community Property State. So, Why Does it Even Matter?
For at least three reasons a lawyer in a common-law state like Iowa needs to have a basic understanding of community property principles.
- A client may move to a community property state. Or perhaps there’s a divorce, one party stays in Iowa, the other moves to Washington).
- A client may buy property in a community property state. Perhaps the client buys a vacation home in Texas.
- The client’s beneficiaries (adult children, for example) may move to a community property state. For example, your daughter marries an Arizonian and they both move to Phoenix.
In all three cases, the distinction between community property and common law states needs to be carefully explained to the client. The estate plan may well need revisions, or even just an extra document or two.
Mob With Pitchforks Goes After Iowa Estate Planner
Ugly! Don’t let this happen to you. Seek an experienced estate planner, who knows the right questions to ask, and be sure to offer them as much information as you possibly can.
Questions or Concerns About Community Property?
Do you have a vacation home in California? Did your son recently elope and the happy couple moved to New Mexico? It may be time to talk about community property and how it impacts YOUR estate plan. Always feel free to email me anytime at firstname.lastname@example.org. Or call my cell at 515-371-6077. I’d be happy to offer you a free one-hour consultation.
The September edition of GoFisch is live! This month’s edition features:
- Legal lessons worth learning from our back to school series
- GoFisch Book Club pick for October
- Iowa-based nonprofit & charitable giving news
- Must-read blog post highlights
- Interesting YouTube video interview with the President of the Ford Foundation
- Free guide to Estate Planning Made Simple
In June 2018, the U.S. Supreme Court handed down a decision in South Dakota v. Wayfair that changed the way remote sellers (like internet companies) do business in states where they don’t have a physical presence, like a brick and mortar store or a headquarters. Essentially it means these companies will start collecting sales tax in certain states with economic nexus laws already on the books to enforce collection against said remote retailers. Iowa is one such state.
What does this mean for you and your nonprofit? Most nonprofits may start seeing sales tax tacked on to certain receipts for digital accounts/services. (The rate of sales tax is based on your Iowa primary contact address.) But, some nonprofits are exempt from sales tax and therefore will need to remit an exemption certificate to the remote seller.
Taxes and Nonprofits
The interplay between taxes and nonprofits can be confusing. Even if a nonprofit is exempt from state and federal income taxes, it does not mean that entity is auto exempt from paying sales tax for goods and (taxable) services. Generally, sales taxes must be paid unless the nonprofit falls under the umbrella of some other applicable general sales tax exemption. (Local option sales taxes must also be paid on purchases made in existing areas.)
However, the Iowa Code does exempt certain nonprofits from paying sales tax on purchases. The Iowa Department of Revenue’s guide to “Iowa Tax Issues for Nonprofits” provides a (non-exclusive) list of entities that are specifically exempt from sales/use taxes under Iowa law. I’ve included the pretty lengthy list here for your convenience!
- American Red Cross
- Navy Relief Society
- U.S.O. (United Service Organizations)
- Community health centers (as defined in 42 U.S.C.A. subsection 254c)
- Migrant health centers (as defined in 42 U.S.C.A. subsection 254b)
- Residential care facilities and intermediate care facilities for the intellectually disabled and residential care facilities for the mentally ill (licensed by the Department of Inspections and Appeals under Iowa Code chapter 135C)
- Residential facilities for intellectually disabled children (licensed by the Department of Human Services under Iowa Code chapter 237)
- Residential facilities for child foster care [licensed by the Department of Human Services under Iowa Code chapter 237, except those maintained by “individuals” as defined in Iowa Code subsection 237.1(7)]
- Rehabilitation facilities which provide accredited rehabilitation services to persons with disabilities and which are accredited by the Commission on Accreditation of Rehabilitation Facilities or the Accreditation Council for Services for intellectually disabled and other developmentally disabled persons and adult day care services approved for reimbursement by the Iowa Department of Human Services
- Community mental health centers (accredited by the Department of Human Services under Iowa Code chapter 225C)
- Home and community-based services providers certified to offer Medicaid waiver services by the Department of Human Services that are any of the following:
- Health and disability waiver service providers, described in 441 IAC 77.30.
- Hospice providers, described in 441 IAC 77.32.
- Elderly waiver service providers, described in 441 IAC 77.33.
- AIDS/HIV waiver service providers, described in 441 IAC 77.34.
- Federally qualified health centers, described in 441 IAC 77.35.
- Intellectual disabilities waiver service providers, described in 441 IAC 77.37.
- Brain injury waiver service providers, described in 441 IAC 77.39.
- Sales of tangible personal property and services made to nonprofit hospitals and nonprofit hospices (licensed under Iowa Code chapter 135B)
- Statewide nonprofit organ procurement organizations
- Nonprofit legal aid organizations
- Nonprofit organizations organized solely for the purpose of lending property to the general public for nonprofit purposes
- Nonprofit private museums*
- Governmental units, subdivisions, or instrumentalities of the federal government or of the state of Iowa (This includes state, county, and local subdivisions of the government of the State of Iowa and those of any other state which provide a similar sales tax exemption to Iowa and its political subdivisions.) *
- Recreational lake and water quality districts*
- Federal corporations created by the federal government which are exempt under federal law *
- Private nonprofit educational institutions located in Iowa *
- Private nonprofit art centers located in Iowa
- Habitat for Humanity in Iowa when purchasing building materials *
- Toys for Tots when purchasing toys
- Community action agencies as defined in Iowa Code section 216A.93
- Substance abuse treatment or prevention facilities that receive block grant funding from the Iowa Department of Public Health
Sales Tax Exemption in Action
So, let’s say you’re an Iowa private nonprofit grade school that subscribes to an online newsletter service (which is based in California) so that administrators can design, write, and send a weekly email update to parents of students. Your organization would likely be exempt from the new sales tax charges imposed by the remote seller on your subscription rate.
Down to the Details
Exempt nonprofits must pay for their purchases from the entity’s account and should complete and submit an Iowa Sales Tax Exemption Certificate 31-014 to the remote seller.
Questions? Not sure if your nonprofit qualifies for this exemption? Don’t hesitate to contact me at any time to speak about your situation.