Question: Can my Will direct how federal and state estates will be paid?
Answer: Yes, estate taxes may be ‘apportioned’ to the beneficiaries of an estate or trust. While the “Tax Cuts and Jobs Act” doubled the gift and estate tax exemption to $11.18 million for 2018, there are a number of people who still have to contend with significant federal and (in some cases) state estate taxes.
An apportionment clause specifies how the estate tax burden will be allocated among the beneficiaries. Leaving this clause out may result in unintended consequences for the estate beneficiaries.
Of the various ways to apportion estate taxes, one option is to have all of the taxes paid out of the assets of the probate estate. Beneficiaries who receive assets outside of the probate estate such as IRAs and life insurance proceeds will not bear any of the estate tax burden.
Another possibility is to allocate taxes among all beneficiaries, including those that receive assets outside of the probate estate.
A more common approach is to allocate taxes out of the ‘residuary’ estate (the portion of the estate after all bequests and expenses are paid).
If all the beneficiaries of the estate are the same and getting an equal portion of all assets, the distinctions may not matter. But suppose that your daughter is being left your house, but your son is left the balance of your residuary estate…If taxes are paid out of the residuary estate, your son will bear the burden of the taxes, including the house which passes to your daughter. You also need to consider that your daughter may not have the funds to pay the taxes without selling the property. Either way, the tax clause should address these issues, particularly if there are likely to be estate taxes owing.
As always, if you have any questions or would like to learn more, please let me know.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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