Hazards of Overlooking Your Tax Apportionment Clause

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.

Authored by: Dorothy J. Santos

A recent amendment to New York’s renunciation statute provides a new estate tax planning opportunity to owners of certain types of joint property.  A renunciation (or disclaimer) generally refers to the process of giving up an interest in another person’s property.  Renunciations are often used in the estate tax planning context to carry out the terms of an estate plan.  This recent change in the law may help owners of certain types of joint property to carry out the terms of their estate planning, thereby decreasing their estate tax liability. 

Under prior law in New York, the surviving co-owner of joint property could not renounce any portion of the property allocable to amounts that he or she contributed to the property.  For example, A and B own real property jointly and A furnished all of the consideration for the property.  If B dies, A cannot renounce any of B’s interest in the property that A receives by reason of B’s death because A furnished all of the consideration for the property.

Now, under New York law, the surviving co-owner of joint property (other than bank, brokerage or other investment accounts) generally may disclaim the other’s interest in the property regardless of the portion of the property attributable to consideration furnished by the disclaiming party.  In the above example, absent special circumstances, A would be able to renounce B’s interest in the property even if A furnished all of the consideration for the property.

This change in the law may be especially helpful to married couples who have executed “disclaimer-type” Wills.  A disclaimer-type Will leaves everything to the surviving spouse and provides that any property disclaimed by the surviving spouse passes to a trust for the benefit of the family.  Such a disclaimer is made by the surviving spouse in order to make use of the predeceased spouse’s estate tax exemption (currently $5,000,000 at the federal level and $1,000,000 at the state level in New York).  The amendment to New York’s renunciation statute may help families and their tax advisors to carry out the terms of an estate plan by providing additional property with which to fund the trust, thereby increasing the use of the predeceased spouse’s estate tax exemption. 

If you have any questions about the points raised herein or would like to explore how the recent change in the law may affect your estate planning, please let us know.