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December 8, 2011 0

Hazards of Overlooking Your Tax Apportionment Clause

By in Estate Planning & Wealth Protection

Authored by: Dorothy J. Santos

A tax apportionment clause, the provision in a Will or Revocable Living Trust governing the payment of estate tax at death, can drastically affect the disposition of your estate and the shares that your beneficiaries receive.  This provision is not mere “boilerplate” and should be fully discussed (and understood) with one’s counsel when the Will or Trust is being prepared. 

A recent Surrogate’s Court decision in New York demonstrates the importance of the tax apportionment clause and its coordination with the other provisions of the document.  In Matter of Sued, the Executor of the decedent’s estate brought a proceeding to construe the decedent’s Will.  This proceeding was brought because the beneficiaries (the decedent’s five children) disagreed as to how the estate tax would be apportioned amongst them pursuant to the terms of the Will. 

The Will left certain real property to one of the decedent’s children and left the balance of the decedent’s estate in equal shares to the decedent’s five children.  However, the language used in the Will created a question as to whether the real property was technically part of the residuary estate (the part of the estate left after payment of liabilities and certain bequests).  Faced with two possible interpretations, the Executor asked the Court to rule that the real property was not a part of the residuary estate.    

The significance of this determination comes into focus after considering the tax apportionment clause in the Will.  Under the tax apportionment clause, the estate tax was directed to be paid out of the residuary estate.  If the Will was given the meaning propounded by the Executor, the decedent’s five children would be required to pay the tax on all property (including the real property) in equal shares and the recipient of the real property would receive it tax free.

After examining the Will, the Court concluded that it was clear that the real property was a part of the residuary estate.  In addition, the Court found no indication in the Will that the decedent intended the recipient of the real property to receive it free of tax.  Accordingly, the Court held that each child of the decedent, including the recipient of the real property, must pay his or her share of the estate tax based on the value of property he or she received.  The Court also noted that even if the Will wasn’t clear, this would be the result.  Under New York law, unless there is a clear and unambiguous direction against apportioning the tax against the beneficiaries according to his or her share of the estate, it must be apportioned in that way.    

This decision illustrates the importance of coordinating the tax apportionment clause in your Will or Revocable Living Trust with the other provisions of the document and making sure the result is one that you intend.  If the application of your tax apportionment clause does not achieve the results that you intend, the disposition of your estate and the shares received by your beneficiaries may be drastically altered.  In addition, a faulty tax apportionment clause may increase the estate tax due or even create an estate tax in an instance in which it could have been avoided.

If you have any questions or would like to learn more about the issues discussed herein, please contact our firm and speak to one of our Estate Planning attorneys.

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