Transfer Tax Payment and Apportionment (Portfolio 834)

Description

Tax Management Portfolio, Transfer Tax Payment and Apportionment, No. 834, is a study of the law concerning the payment and apportionment of federal and state wealth transfer taxes. The portfolio discusses both federal and state law and examines the interplay of those rules with the tax payment provisions contained in wills and other estate planning instruments. The portfolio is designed principally for estate planners, for trust and estate fiduciaries and their counsel, and for lawyers and other professionals involved in both tax and nontax litigation concerning apportionment matters.
Estate planners often overlook transfer tax apportionment issues, relying either on the default rules of state and federal law or on boilerplate tax payment provisions contained in will and trust forms. For several reasons, uncritical reliance often is misplaced. First, in large estates, more property may pass under the tax payment provision of a will or trust than under all of the other provisions combined. Thus, crafting an appropriate tax payment provision is at least as important as the other dispositive elements of a sophisticated estate plan. Second, the prevalence of various nonprobate property interests (such as jointly held property, revocable inter vivos trusts, and retirement benefit plans) means that a substantial portion of the gross estate is not subject to estate administration; failing to apportion taxes to substantial nonprobate assets that generate a portion of the tax bill may bankrupt the probate estate. Third, tax apportionment affects both the relative shares received by estate beneficiaries and, under certain circumstances, the amount of the aggregate tax liability; failing to apportion taxes properly may subject the estate to a larger than necessary wealth transfer tax burden. The portfolio is designed to give planners the tools needed to address these questions with greater care and clarity.
Tax apportionment issues also are profoundly important to fiduciaries. Failing to understand and to implement an apportionment scheme may constitute a breach of fiduciary duty (for example, if a personal representative fails to collect taxes from nonprobate beneficiaries, thus potentially harming probate beneficiaries). A failure to consider apportionment questions also may subject the fiduciary to personal liability to the government (for example, if the fiduciary distributes estate assets based on tax miscalculations, by failing to reduce a marital bequest by taxes properly charged thereto) or to beneficiaries (including nonprobate beneficiaries to whom a portion of the tax liability is apportioned) who are affected by the fiduciary’s tax administration. A general misunderstanding of the law in this area and the failure to address apportionment issues properly has spawned litigation in both state and federal courts; indeed, tax payment questions probably constitute the single greatest source of estate planning and administration malpractice in terms of matters litigated. The portfolio provides an exposition of existing apportionment law as well as the author’s views relating to interpretative questions on which legal guidance is inadequate.

This portfolio may be cited as Pennell, 834 T.M., Transfer Tax Payment and Apportionment.

Table of Contents

I. Introduction
II. Federal Apportionment Rules
III. State Apportionment Rules
IV. Planning and Drafting for Tax Apportionment
V. Liability for Taxes