Ira Mark Bloom's “Unifying the Rules for Wills and Revocable Trusts in the Federal Estate Tax Apportionment Arena: Suggestions for Reform” discusses the various state laws on federal estate tax apportionment. It also covers the Internal Revenue Code sections dealing with these issues: Sections 2206 (life insurance), 2207 (powers of appointment), 2207A (qualified terminable interest property) and 2208 (transfers with retained life estate). Bloom points out that the 2003 Uniform Estate Tax Apportionment Act provides that the tax apportionment provisions of the will control over any inconsistent provisions in a revocable trust, and that in some states a will can exonerate assets in a revocable trust, but not vice versa.
The article also explores conflicts-of-law issues. For example, Bloom cites a case in which a decedent in a state where the default is to apportion tax against non-probate assets, was a joint owner of real estate in a jurisdiction where the default was that estate taxes were payable out of the residuary estate.
The author concludes that testators should be able to override the default apportionment rules in a revocable trust to the same extent as in a will. But he does not distinguish between using assets in a revocable trust to pay the tax on other assets (which can be viewed as a form of disposition of the revocable trust assets) and attempting in a revocable trust to exonerate the assets passing under the revocable trust itself (which would effectively amend the testator's will; something New York law, for example, prohibits).
The article serves as an important reminder: The tax apportionment rules can be complicated. Also, if there are non-testamentary assets included in the gross estate, testators should make it clear how the estate taxes are to be paid, and make sure that the tax apportionment provisions of the will are consistent with the tax apportionment provisions of the non-testamentary instrument, whether a revocable trust or an irrevocable trust such as an insurance trust to which the testator transferred a policy within three years of death, or some other irrevocable trust in which the testator retained an interest such that it is included in the gross estate for estate tax purposes.
Reviewer: BRUCE D. STEINER is of counsel in the New York office of Kleinberg, Kaplan, Wolff & Cohen, P.C. He's also a member of the Trusts & Estates advisory committee on retirement benefits