April 10, 2009
Re: Inheritance tax, Estate of D, your letter, 03-25-2009.
Your recent letter to the Director of the Iowa Department of Revenue has been given to me for reply. You requested the Department’s position regarding the Estate of D.
The following facts are the basis for your request. Some years ago, D gave birth to her daughter F. F had two sons, Casey and Johnaton. At some point in time, F died, predeceasing her mother. Subsequent to her death, the natural father’s rights as a parent of the two boys was terminated. After this termination occurred, Casey and Johnaton were adopted by a couple who were not blood relations to them. The adoption was complete and in accordance with the laws of the jurisdiction where it took place. Recently, D died. In her will and a codicil to the will, she left the rest, residue, and remainder of her estate to a trust for the ultimate benefit of her natural grandsons Casey and Johnaton .
Your question: Is the estate of D obligated to file an Iowa inheritance tax return and pay any tax due on the value of the assets passing to the trust ultimately for the benefit of Casey and Johnaton ?
Iowa law is clear on this point. An Iowa inheritance tax return must be filed and any tax due must be paid based on the transfer of funds to the trust. Iowa Code subsection 450.7(1) (2009) places a lien in favor of Iowa inheritance tax on any property passing by will or intestate succession with the following limitations:
1. Except for the share of the estate passing to the surviving spouse, and parents, grandparents, great-grandparents, and other lineal ascendants, children including legally adopted children and biological children entitled to inherit under the laws of this state, stepchildren, and grandchildren, great-grandchildren, and other lineal descendants, the tax is a charge against and a lien upon the estate subject to tax under this chapter, and all property of the estate or owned by the decedent from the death of the decedent until paid, subject to the following limitation:
Inheritance taxes owing with respect to a passing of property of a deceased person are no longer a lien against the property ten years from the date of death of the decedent owner regardless of whether the decedent owner died prior to or subsequent to July 1, 1995, except to the extent taxes are attributable to remainder or deferred interests and are deferred in accordance with the provisions of this chapter.
Both natural and adopted children are “entitled to inherit under the laws of this state” free of any lien in favor of inheritance tax and thus free of any obligation to pay that tax. But what are the limitations on that right for someone who has been adopted and when that adopted person has the potential to inherit from both one’s natural and adoptive parents? Those limitations are set out in § 633.223 of the Code which reads as follows:
633.223 EFFECT OF ADOPTION.
1. Except as provided in subsection 3, a lawful adoption extinguishes the right of intestate succession of an adopted person from and through the adopted person's biological parents. The adopted person inherits from and through the adoptive parents in the same manner as a biological child inherits from and through the child's biological parents.
2. Except as provided in subsection 3, a lawful adoption extinguishes the right of intestate succession of a biological parent from and through the parent's biological child who is adopted. The adoptive parents inherit from and through the adopted person in the same manner as biological parents inherit from and through the parents' biological child.
3. An adoption of a person by the spouse or surviving spouse of a biological parent has no effect on the relationship for inheritance purposes between the adopted person and that biological parent or biological parent's heirs. An adoption of a person by the spouse or surviving spouse of a biological parent after the death of the other biological parent has no effect on the relationship for inheritance purposes between the adopted person and the deceased biological
parent's heirs.
4. A person inherits through an adopted person, an adoptive parent, or a biological parent of an adopted person only if the adopted person, adoptive parent, or biological parent of an adopted person would have inherited under subsection 1, 2, or 3.
The section does two things. It establishes a child’s right to inherit from its adoptive parents and ends its right to inherit from its natural parents. The cases and commentator are in agreement: aside from the circumstance mentioned in § 633.223(3), the section terminates all right to inherit from the natural parents. It seems clear from a reading of the statute that it is the lawful act of adoption which does this. Once adoption has occurred, nothing more is needed. Your letter explains that the natural mother never surrendered her parental rights. This is true, but not relevant in this case. The only way that circumstance could be relevant is if the failure to secure her permission prevented a lawful adoption from taking place. That is obviously not the case here.
In support of the above conclusions, see the following: Sheldon F. Kurtz, Kurtz on Iowa Estates, Vol. I, § 3.10 at p. 114 (3rd e. 1995); In re Estate of Mills, 374 N.W.2d 675 (Iowa 1985), and Pazzi v. Taylor, 342 N.W.2d 481 (Iowa 1984). The Mills case is especially instructive. It involved adoption by a single parent, a male. The adopting father died and then the adopted child died. The natural siblings and nephew of the adopted child argued that they had the right to inherit from her by way of the natural mother and grandmother. They argued that this interpretation of § 633.223 preserved equality and fairness between adopted and natural children by allowing both the opportunity to inherit from and through two parental lines. The Supreme Court rejected the argument, holding that the statute controlled single parent as well as two parent adoptions, In re Estate of Mills at p. 677.
I understand your closing comments. You state that the Department’s interpretation of § 633.223“gives rise to an anomaly in that in every other area of Iowa law, the law favors, rather than penalizes adoption.” You also write “such a result is not only anomalous, it is completely unfair, harsh, and a penalty to my deceased client, D.”
The Department enforces the laws as written. You may believe that this is unfair and creates a penalty in this factual situation. Your recourse is to work with the Iowa Legislature to amend the law. Based on current Iowa law, the Estate of D must file an Iowa inheritance tax return and pay any tax that is due.
In closing, I must issue this warning. Please be advised that this letter is an informal opinion and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance. Because of this, the Department could, in the future, take a position contrary to that stated in the letter.
Sincerely,
David L. Casey
Administrator
Compliance Division
515-281-6163
cc: Director Schuling