Estate Tax: Who Pays Among the Beneficiaries?

You are proud of yourself for finally finishing your estate plan. You decided who will receive your assets upon your death; you have Wills, Powers of Attorneys and Medical Directives; you also have Revocable Trusts to avoid probate. If you are married, you and your spouse each have credit trusts and marital trusts to protect from estate tax as much as the law allows at the first and second deaths. You have trusts for your children so they cannot spend the money all at once, and these trusts also are designed to protect the children’s assets in the event of divorce. Also, you have selected your Executors, Trustees, and the Guardians for your minor children. Finally, you coordinated the beneficiary designations and the titling of your assets so the Revocable Trusts are funded and the assets are balanced for estate tax purposes. You can relax, right? You are done? Perhaps not as a recent Wisconsin case illustrates.

In J. Sheppard Est., recently decided by the Wisconsin Supreme Court and reported by CCH at 2010-1USTC, Para 60,593, the decedent left $3.8 million by beneficiary designation to his goddaughter. The Estate Executor sought to collect the allocable share of estate taxes from the goddaughter. Because Wisconsin does not have a tax apportionment statute (and for other technical reasons outside the scope of this Post), the court held that the goddaughter was entitled to the entire $3.8 million free of estate tax.

In contrast, Virginia does have an apportionment statute, so assuming the Will is silent, the Executor could have collected an allocable share of the estate taxes on the $3.8 million. The moral of the story is that, in drafting an estate plan, it is important to focus on the various issues mentioned in paragraph one above, and the payment of estate taxes. The issues pertaining to the payment of estate taxes include how the taxes are divided among the beneficiaries and the sources of the payment. You should specifically spell out your intentions in your estate planning documents and not leave it up to state law.