AUTHOR: Mark R. Siegel, Professor of Law, South Texas College of Law, Houston

ARTICLE: “Who Should Bear the Bite of Estate Taxes on Non-Probate Property?” 43 Creighton L. Rev. 747 (2010)
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In this article, Professor Mark R. Siegel discusses the various state laws and court cases on estate tax apportionment, as well as the federal tax provisions on this subject.

The author notes that the default provisions for nonprobate property estate tax vary from state to state. In some states, estate taxes are apportioned against nonprobate dispositions but not against pre-residuary dispositions. In other states, estate taxes are apportioned against both non-probate dispositions and pre-residuary dispositions. Finally, a few states have all of the estate taxes paid out of the residuary estate, without apportionment against either non-probate dispositions or pre-residuary dispositions.

The author points out that there has been a good deal of litigation over estate tax apportionment. Often, a will isn’t clear as to whether both pre-residuary and nonprobate dispositions or only pre-residuary dispositions are free from estate taxes. While not discussed in the article, this issue is increasingly important now that qualified plan and retirement benefits make up a large portion of an individual’s assets, and there are income tax benefits to stretching them out as long as possible.

The author explains that court cases have been inconsistent as to the degree of specificity that’s needed to override the statutory default provisions, primarily

as to whether non-probate dispositions are exonerated from estate taxes. Given the use of the statutory default provisions as a starting point, some courts hold that a direction to pay “all taxes” out of the residuary estate is sufficient to exonerate pre-residuary dispositions but not to exonerate non-probate dispositions. The author concludes that states should require the testator to expressly indicate any intention to exonerate non-probate dispositions. He believes that this would inspire better drafting and also reduce the amount of litigation over estate tax apportionment. He cites as an example the Florida statute, currently F.S.A. Section 733.817(5)(h)4, which provides that to exonerate non-probate property from estate taxes, a will must either expressly refer to that statutory provision or expressly indicate that the probate estate is to bear the burden of the estate taxes on the non-probate property. However, he doesn’t mention that the Florida statute’s default provision requires that estate taxes on pre-residuary dispositions be paid out of the residuary estate.

The article serves as a useful reminder that the tax apportionment rules can be complicated and can vary from state to state. If there are non-probate assets included in the gross estate, testators should make it clear how the estate taxes are to be paid.