By Edward Mendlowitz, PFS, ABV, CPA, Mendlowitz Weitsen LLP CPAs

A will should state whether the estate tax is to be apportioned among each bequest or paid from the residuary estate. This is particularly important if assets such as life insurance proceeds, IRAs, or pension distributions are passing outside of the estate. An apportionment clause determines which beneficiaries will bear the payment of estate taxes.

One way of apportioning taxes is to have the taxes paid only from the assets passing through the will. Amounts passing outside the will, such as through an IRA or pension plan, will not bear any of the estate taxes. This could substantially reduce bequests made in the will. The other way is to apportion the taxes to all heirs, including those receiving assets outside the will.

If estate taxes are apportioned to IRA and pension plan beneficiaries and funds withdrawn to pay such taxes, the payment of income taxes on those amounts would be accelerated, further reducing the amounts left to those beneficiaries. Likewise, beneficiaries of nonmonetary assets, such as automobiles or artwork, would have to reach into their own funds to pay their share of the estate taxes.

Testators that want to leave fixed sums to specific people should consider whether these amounts should bear any of the estate tax burden. Again, if taxes are not apportioned, the heirs of the residue will have their bequests reduced by taxes.

The Exhibit shows the effects with and without apportionment. The amount of estate tax paid by the beneficiary, where there is apportionment of estate taxes, is in the same ratio as its value to the gross taxable estate. This is different than the calculation for the estate tax income tax deduction for a beneficiary’s IRD distribution, which is arrived at by calculating the federal estate tax (after reduction by the state tax credit) with and without the IRD (see the accompanying article, “Income in Respect of a Decedent”). The results for an individual with a marital deduction will be different as well.

The Exhibit assumes 2002 rates and unified credit. This is not an exact calculation of estate taxes; the purpose of the example is to show the effect of apportionment on the residuary estate paying the estate tax.

©2002 CPA Journal. Legal Notices