WHO SHOULD BEAR THE BITE
OF ESTATE TAXES ON
NON-PROBATE PROPERTY?
MARK
R.
SIEGELt
I.
INTRODUCTION AND OVERVIEW
A.
INTRODUCTION: SETTING THE STAGE
As you begin to study the property transfer provisions in the will,
you immediately detect a similar pattern. The initial articles of the
will that you are reviewing make several different dispositions of
property. One disposition is a general bequest of cash. Further, the
preliminary articles bequeath personal property and thereafter devise
the home. The final provision disposes of the balance of the property. 1
Several hundred thousand dollars are owed in estate taxes. The estate tax bill is attributable not only to assets disposed of by the will,
known as the probate estate, but also to assets passing outside of the
will, or the non-probate estate. 2 Will each asset be responsible for its
pro rata share of the taxes, or will certain assets be relieved of the
burden of taxation? How the tax liability is shared will undoubtedly
create the potential for adversarial relations if certain beneficiaries
receive their property free and clear of any pro rata share of tax liability while others bear more than their pro rata share. In this manner,
one can readily see how an allocation of tax liability in the tax clause
of the governing instrument is most properly viewed as a dispositive
provision even if the tax clause is not technically a pre-residuary or
residuary disposition.
A long standing tradition exists in this country to impose a tax on
property held by the decedent at the time of death. Taxes imposed
upon death may take one of two primary forms. An estate tax is levied
on the transfer of property by the decedent. 3 The federal estate tax is
an example of this form because it is a tax on the right to transfer
t Professor of Law, South Texas College of Law; LL.M., Emory University; J.D.,
Florida State University; B.S.B.A., University of Florida.
1. This provision is commonly referred to as the residuary clause. Those dispositions made prior to the residuary clause are known as pre-residuary clauses or
dispositions.
2. In JESSE DUKEMINIER, ET AL., WILLS, TRUSTS, AND ESTATES 38 (8th ed. 2009),
the following helpful definition states:
Probate property is property that passes through probate under the decedent's will or by intestacy. Nonprobate property is property that passes outside
of probate under an instrument other than a will.
3. In re Will of Cooney, 541 N.W.2d 467, 476 (Wis. 1995).
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property. An inheritance tax, in contrast, is imposed on the benefi4
ciaries receiving the property from the estate.
As a wealth transfer tax, the federal estate tax is not limited to
those assets disposed of by will or transferred through intestacy. The
federal estate tax is imposed on the transfer of probate and non-probate property. By federal statute, the personal representative of the
estate has personal liability for the payment of federal estate taxes
attributable to the probate and non-probate property.
Few tax lawyers and estate planners would contest the notion
that a will should address how any estate taxes owed are to be paid
and by whom. Charging the taxes solely to the assets passing under
the will achieves a very different outcome compared to apportioning
the taxes to all beneficiaries of the decedent's wealth, including those
5
receiving assets passing outside of the will.
Suppose Tom Testator's will left cash bequests to his children, a
specific bequest of his car to his brother, a devise of his principal residence to his sister, and the residue of his estate to be divided equally
among his siblings and descendants. At common law, because the preresiduary dispositions of cash, the car, and the principal residence
were not responsible for the payment of the estate taxes, these beneficiaries received these assets without reduction for any estate taxes
attributable to them. The residuary estate, and in turn, the residuary
beneficiaries, would ultimately be responsible for the estate taxes, including any taxes on amounts passing to the pre-residuary beneficiaries or passing outside of the will. Payment of the estate taxes by
the residuary beneficiaries reduces the value of the property passing
to them. This common law rule came to be known as the "burden on
the residue" rule. This rule serves to facilitate administration of the
decedent's estate because the executor does not have the task of collecting from each beneficiary a proportionate share of the estate tax.
Moreover, by making the residuary beneficiaries responsible for the
estate tax, those beneficiaries receiving pre-residuary bequests or
property outside of the will were absolved from liability for any portion of the estate tax. Thus, pre-residuary and non-probate beneficiaries did not have to find an available source of cash to contribute to
the executor. The balance struck by the burden on the residue rule
avoided cash liquidity problems for pre-residuary takers but created
concerns for residuary beneficiaries who were then burdened by the
taxes. Depending on the magnitude of both pre-residuary dispositions
4. Cooney, 541 N.W.2d at 476.
5. For example, this would include recipients of life insurance proceeds, retirement plan/IRA distributions, and joint tenancy with rights of survivorship property
bearing a share of the estate tax payment.
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ESTATE TAXES ON NON-PROBATE PROPERTY
749
and property passing outside of the will, the consequences to the residue may range from diminution to complete depletion.
Since the common law approach 6 failed to apportion the estate
tax to property contributing to the tax liability, complaints arose from
residuary beneficiaries whose bequests were effectively reduced by the
estate taxes. This displeasure prompted many state legislatures and
courts to change state law by adopting estate tax apportionment rules.
The apportionment rules addressed the issue by striking a balance different from the burden on the residue rule. The standard rule divides
the burden of estate taxes among the decedent's beneficiaries creating
a burden on the recipient rule. Under the estate tax apportionment
regime, the estate tax is allocated among the recipients of both probate and non-probate property, as both classes of property are included in the estate tax calculation and contribute to the tax liability.
Equitable apportionment reflects an important principle that non-probate property should bear a proportionate share of the estate tax
where such property contributes to the tax amount due. This princi7
ple, provided for in the Uniform Estate Tax Apportionment Act, will
yield to the testator's expressed desire to have estate taxes paid in a
8
different manner.
Under equitable apportionment, the notion of burdening the recipient rather than the residue does not universally make estate administration more difficult. Not only may the non-probate assets be
liquid 9 but also the residue may be comprised of illiquid assets. 10
Therefore, the needed cash that the executor must generate for the
estate tax payment may be more readily forthcoming from the nonprobate property than illiquid residuary assets. Further, testators
frequently designate beneficiaries for property passing outside of probate. By applying rules that make beneficiaries of non-probate property responsible for any estate tax liabilities attributable to such
property, potential inequitable and unintended results may be
avoided.
6. As noted, the common law approach promoted administrative efficiency by obviating the need for the executor or administrator of the decedent's estate to collect or
seek recovery or reimbursement from each beneficiary of the decedent's property.
7. Unif. Estate Tax Apportionment Act of 2003, 8A U.L.A. 191 (Supp. 2009). The
Act's apportionment concept was first adopted in 1958, Unif. Estate Tax Apportionment
Act of 1958, 8A U.L.A. 281 (West 2003 & Supp. 2009) and revised in 1964, Unif. Estate
Tax Apportionment Act of 1964, 8A U.L.A. 261 (West 2003 & Supp. 2009) and 2003,
Unif. Estate Tax Apportionment Act of 2003, 8A U.L.A. 191 (Supp. 2009).
8. Although apportionment under state law may be overridden by the decedent's
contrary direction, there remains a bias in favor of apportionment under state law. See
discussion, infra notes 24, 172 and accompanying text.
9. For example, cash in jointly held bank accounts and life insurance proceeds.
10. For example, closely held corporate stock and limited partnership interests.
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The question arises whether a decedent who provides for a beneficiary through a pre-residuary bequest or non-probate transfer necessarily intends for that person to be exonerated from state law
apportionment of estate taxes so that such beneficiary receives the financial benefit of the property in full.
B.
OVERVIEW: COMPONENTS OF THE WILL AND GENERAL
APPROACHES TO APPORTIONMENT
Well drafted wills not only provide for property dispositions but
also do so in a particular order. There are several classes of dispositions within the will. The pre-residuary dispositions under the will
most typically take the form of specific, 1 1 general, 12 and demonstrative. 13 As its name implies, the residuary clause operates to dispose of
all other property not effectively disposed of by the pre-residuary specific, general, or demonstrative bequests.
The focal point in estate tax apportionment concerns where the
burden of the estate tax falls. If applicable state law 14 or the governing instrument allocates the estate tax burden to the residuary
probate estate, these assets are subject to consumption and attendant
reduction while the recipients of the pre-residuary bequests are
spared. As an alternative approach to estate tax apportionment, governing law may apportion estate taxes against each asset included in
the gross or taxable estate based on the value of those assets. In contrast to the first approach, this alternative approach places responsibility on each beneficiary under the will, whether the recipient of a
specific, general, demonstrative, or residuary bequest, for a proportionate share of the estate taxes payable.
An approach to estate tax apportionment that allocates the tax to
those assets generating the tax may give rise to further complications
beyond the preceding probate estate example. Suppose there are beneficiaries of probate and non-probate assets, all of which contribute to
the estate tax liability. 15 Full apportionment would mean that each
11. A testamentary gift of a specific or particular item of the estate. For example,
"I leave my shares of General Motors stock."
12. A testamentary gift payable out of the general assets of the estate. For example, "I leave the sum of $1,000."
13. A testamentary gift, which by its terms, must be paid from a specific fund
rather than the general estate. For example, "I leave the sum of $1,000 to be paid from
my shares of General Motors stock."
14. The applicable state law may be determined either by statute or judicial
decision.
15. A non-probate asset - required to be included in the gross estate - payable to a
surviving spouse or qualified charity will qualify for an estate tax marital deduction,
§ 2056, or charitable deduction, § 2055. I.R.C. §§ 2055-56 (2006). As a result, no estate
taxes will be due from the estate for such property.
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ESTATE TAXES ON NON-PROBATE PROPERTY
751
asset, whether or not the asset passes under the will, bears a proportionate share of the tax the asset helps generate. In this manner, each
beneficiary, including the beneficiaries of non-probate assets contributing to the estate tax bill, bears a fair share of the taxes.
For a typical estate comprised of both probate and non-probate
assets, in the absence of full apportionment, the residuary assets
would be responsible for paying the taxes attributable to the non-probate property. The presence of non-probate property may serve to diminish or even exhaust the residuary estate if there is significant fair
market value inherent in the non-probate assets.
In certain situations full apportionment may trigger unwanted results. Property passing in a qualified manner to a surviving spouse or
qualified charity will generate an estate tax marital 16 or charitable
deduction.1 7 However, if the spouse or charity is obligated to pay its
proportionate share of the estate taxes, the amount of the marital or
charitable deduction is reduced by the amount of the taxes.1 8 Reducing the amount of the deduction increases the amount of estate taxes.
As a variation on full apportionment, equitable apportionment relieves marital and charitable gifts from contributing toward the payment of estate taxes and prevents reduction of the estate tax
deduction. The equitable apportionment doctrine modifies the full apportionment approach by recognizing that deductible gifts to a spouse
or charity do not contribute to the estate tax and should not therefore
be charged with a proportionate share of the overall estate tax.
Thus, equitable apportionment principles would prevent the estate tax deduction reduction problem described above from occurring
where non-probate assets pass to a surviving spouse or qualified
charity. 19
The federal estate tax is imposed on the decedent's entire gross
estate. 20 The gross estate is comprised of both assets included in the
probate estate2 ' as well as non-probate property. 22 Since both categories of property contribute to the estate tax liability, the majority of
16. Id. § 2056
17. Id. § 2055
18. Id. §§ 2056(b)(4), 2055(c).
19. Equitable apportionment rather than full apportionment would prevent the
non-probate property from being charged with any proportionate share of estate tax.
20. The scope of the federal gross estate is discussed infra Section II. As a technical matter, the estate tax is imposed on the taxable estate of the decedent. I.R.C. § 2001
(2006). In order to calculate the taxable estate, the value of property included in the
gross estate is reduced by deductions, § 2051, including deductions provided in § 2053
(relating to certain administration expenses and claims), § 2054 (relating to casualty
and theft losses incurred during administration), § 2055 (relating to qualified gifts to
charity) and § 2056 (relating to qualified gifts to surviving spouse).
21. Treas. Reg. § 20.2031-1(a)(1) (1960).
22. Treas. Reg. § 20.2031-1(a)(2)-(3).
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states have moved to apportion the tax on the entire gross taxable
estate rather than charge the entire tax solely to the probate estate.
Whether the result occurs by statute or judicial decision, the principle
underlying estate tax proration is that those interests creating or contributing to the tax should bear their share of the tax burden or
23
liability.
Even in states that have shifted to a policy favoring proration and
its attendant fair share principles, a testator may expressly shift the
tax burden in a manner contrary to the proration mandate. In determining whether the decedent has expressed an intention contrary to
proration, courts have recognized that apportionment of estate taxes
is the general rule to which exception is made only when the decedent
clearly and unambiguously directs to the contrary. Vague and uncertain language is insufficient to shift the tax burden from where the
law places it. Ambiguities in the language regarding payment of taxes
are to be resolved and interpreted in favor of apportionment. 24
When an estate contains both probate and non-probate property,
the necessary point of inquiry becomes whether the language utilized
by the decedent indicates that the estate taxes attributable to the probate and non-probate assets should be imposed entirely on the probate
estate rather than prorated within the adopted fundamental public
policy.
II.
THE FEDERAL ESTATE TAX
A.
SCOPE OF THE FEDERAL GROSS ESTATE
As a starting point, the federal estate tax is based on the decedent's gross estate. A number of estate tax provisions exist that expressly require inclusion in the federal gross estate.2 5 While the value
of the gross estate includes assets of the probate estate, 2 6 the gross
estate concept is broader than the concept of the probate estate. Any
interest in property the decedent had at the time of death is included
in the gross estate under Internal Revenue Code ("IRC") section
2033.27 Under IRC section 2034,28 a surviving spouse's dower or
curtesy interest in the decedent's property will not avoid gross estate
inclusion. The combination of sections 2033 and 2034 focus on the
probate estate.
23. In re Armstrong's Estate, 366 P.2d 490, 493 (Cal. 1961).
24. In re Estate of Kelly, 584 P.2d 640, 641 (Colo. App. 1978); In re Estate of Kirby,
498 N.E.2d 64, 66 (Ind. Ct. App. 1986); In re Estate of Kyreazis, 701 P.2d 1022, 1024
(N.M. Ct. App.1984); In re Estate of Brownlee, 2002 SD 142, [25, 654 N.W.2d 206, 212.
25. See I.R.C. §§ 2033-2044 (2006).
26. Id. § 2033.
27. I.R.C. § 2033 (2006).
28. I.R.C. § 2034 (2006).
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A number of additional code sections expand the scope of the gross
estate. Several sections address property given away during life but
nevertheless bring such property within the gross estate. 2 9 IRC section 203630 requires the gross estate to include property transferred
during life if the decedent, with respect to the transferred property,
retained the income or the power to designate who shall enjoy the income. IRC section 203731 causes the gross estate to include certain
lifetime transfers under which beneficial enjoyment can occur only by
surviving the decedent. Under IRC section 2038,32 the gross estate
includes property transferred during life if at the time of death the
decedent had the power to change beneficial enjoyment of the
property.
There are additional sections requiring gross estate inclusion for
specific types of property and powers. IRC section 203933 addresses
the gross estate inclusion of annuities, and IRC section 204034 covers
jointly held property. 35 IRC section 204136 includes property over
which the decedent has a general power of appointment. 3 7 IRC section 204238 governs the circumstances in which the gross estate re39
IRC section 204440
quires including life insurance proceeds.
includes the value of any property in which the surviving spouse had a
qualifying income interest at the time of the decedent's death. 4 1 IRC
section 203542 includes any interest in property that would have been
included under sections 2036, 2037, 2038, or 2042, but for its transfer
within three years of death.
29. These sections include IRC sections 2036 through 2038.
30. I.R.C. § 2036 (2006).
31. I.R.C. § 2037 (2006).
32. I.R.C. § 2038 (2006).
33. I.R.C. § 2039 (2006).
34. I.R.C. § 2040 (2006).
35. Section 2040 addresses jointly owned property so long as there is a right of
survivorship in the property. Lacking survivorship rights, section 2040 does not apply
to tenancy in common.
36. I.R.C. § 2041 (2006).
37. To constitute a general power of appointment, the power must be exercisable in
favor of the decedent, the decedent's estate, the decedent's creditors, or creditors of the
decedent's estate. I.R.C. § 2041(b)(1).
38. I.R.C. § 2042 (2006).
39. Insurance proceeds receivable by the executor are included under section
2042(1). For insurance proceeds receivable by other beneficiaries and over which
amounts the decedent had, at the time of death, any incident of ownership, the insurance proceeds are required to be included in the gross estate under section 2042(2).
40. I.R.C. § 2044 (2006).
41. Section 2044 is the gross estate inclusion counterpart to the gift tax or estate
tax marital deduction provisions applicable to the predeceasing spouse under §§ 2523(f)
or 2056(b)(7), respectively. Qualified terminal interest property ('QTI1") trusts are discussed more fully at notes 57-65 and accompanying text.
42. I.R.C. § 2035 (2006).
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FEDERAL APPORTIONMENT PROVISIONS
The federal tax code contains several provisions 43 relevant to the
allocation of the estate tax liability among the decedent's beneficiaries. As the federal estate tax is a tax on the transfer of property
rather than the receipt of property, the federal estate tax is a charge
against the estate, rather than its beneficiaries, absent a contrary will
provision. 44 Under Internal Revenue Code ("IRC") section 220545 a
beneficiary whose interest is diminished by the collection of tax, but
who is not the person upon whom the decedent imposed the tax burden, may be entitled to reimbursement from the estate or from other
beneficiaries. In general, IRC section 220646 requires beneficiaries receiving proceeds of insurance on the life of the decedent contribute to
payment of the estate tax. 4 7 Similar to section 2206, IRC section
220748 requires anyone who has or receives property subject to a gen49
eral power of appointment contribute to payment of the estate tax.
IRC section 2207A 5 0 creates a right of recovery applicable to marital
deduction property included in the surviving spouse's gross estate as
qualified terminable interest property under IRC section 2044.51 If
section 2044 causes gross estate inclusion, the surviving spouse's estate is entitled to recover the estate taxes attributable to the inclusion
from the parties receiving the property, unless the surviving spouse
has provided to the contrary. 5 2 IRC section 2207B 53 creates a right of
recovery in the estate against the recipient of property included in the
decedent's estate under the IRC section 203654 retained interest
rules. 55 In sum, sections 2206, 2207, 2207A, and 2207B create a right
of recovery for estate taxes against certain non-probate property
beneficiaries. 56
43. The sections are I.R.C. §§ 2205, 2206, 2207, 2207A, and 2207B.
44. I.R.C. § 2205 (2006).
45. I.R.C. § 2205 (2006).
46. I.R.C. § 2206 (2006).
47. According to the statute, the general rule of contribution may be overridden by
a contrary provision in the decedent's will.
48. I.R.C. § 2207 (2006).
49. By statute, the contribution rule for section 2041 general powers of appointment yields to a contrary will provision.
50. I.R.C. § 2207A (2006).
51. I.R.C. § 2044 (2006).
52. See infra notes 62-65 and accompanying text. By statute, the contrary direction may be provided by will or revocable trust. I.R.C. § 2207A(a)(2) (2006).
53. I.R.C. § 2207B (2006).
54. I.R.C. § 2036 (2006).
55. In accord with the other recovery provisions, section 2207B provides that a contrary provision in the decedent's will prevails.
56. Other than these few statutes, Congress has not enacted further apportionment type provisions to correspond to the other gross estate inclusion sections covering
non-probate property. The federal apportionment provisions as they exist for limited
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The rights of recovery against life insurance beneficiaries, the recipients of general power of appointment property, persons receiving
qualified terminable interest property upon the termination of the
surviving or donee spouse's interest, and the recipient of property included in the decedent's gross estate because of the proscribed retained interests are subject to contrary direction by the decedent
regarding payment. As a result, the decedent may be able to override
the statutory directive calling for contribution from these beneficiaries
and thereby determine those alternative interests to be diminished by
the estate tax. However, as Section VI will further discuss, the decedent should be required to have expressly directed against recovery of
taxes to negate an apportionment statute.
The Economic Recovery Tax Act of 198157 created a marital deduction for property in a qualified terminable interest property
("QTIP") trust. 58 The QTIP trust provides the surviving spouse with
all of the income from the trust for life. Upon the surviving spouse's
death, the trust assets remaining are to be distributed to the remaindermen that the predeceasing spouse 59 specified in the governing
trust agreement. Technically, the surviving spouse neither owns the
QTIP trust assets outright nor has any control, power, or direction
over the assets. However, if a marital deduction election is made for
the QTIP trust, 60 then the QTIP trust is included in the surviving
spouse's federal gross estate for estate tax purposes. 6 1 The marital
deduction essentially defers the tax incidence on the QTIP trust assets
until the surviving spouse's death.
Congress sought to ameliorate the estate tax burden attributable
to the inclusion of QTIP property in the surviving spouse's estate
when it enacted section 2207A, a section containing two important
provisions. First, in general, the personal representative, on behalf of
the surviving spouse's estate, is empowered to recover the estate taxes
categories of non-probate property included in the gross estate reflect the fact that such
property is not actually handled as part of the probate estate by the executor because it
does not pass through the hands of the executor. See Riggs v. Del Drago, 317 U.S. 95,
102 (1942) discussed infra note 66.
57. The Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172.
58. I.R.C. § 2056(b)(7) (2006).
59. The predeceasing spouse is the settlor of the QTIP trust.
60. The marital deduction prevents the estate tax liability from being due at the
time of the first decedent's death with respect to the QTIP trust assets.
61. I.R.C. § 2044 (2006). By including the QTIP trust in the survivor's estate,
§2044 is one example of estate tax inclusion for non-probate property. For federal estate
tax purposes, this section treats the entire trust as part of the surviving spouse's federal
gross estate even though the survivor only has an income interest for life. In this manner, rather than impose estate tax liability upon the first spouse's death, one sees that
the estate tax marital deduction defers or postpones the estate tax until the surviving
spouse's death.
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allocable to the QTIP trust from the QTIP trust remaindermen. 62 The
right of recovery is effectively a federal rule of estate tax apportionment,63 placing the tax liability on the recipients of the QTIP trust
assets.6 4 Second, to shift the burden the statute initially places on the
QTIP trust, the surviving spouse could waive the federal recovery
right, as originally enacted, if the surviving spouse "otherwise direct[ed] by will."65 An effective waiver would exonerate the QTIP
trust beneficiaries from having to pay the estate taxes caused by the
QTIP trust inclusion in the surviving spouse's estate.
The impact of state law on the apportionment of estate taxes,
whether by statute or judicial decision, cannot be overlooked and does
not necessarily conflict with the federal apportionment statutes discussed above. In Riggs v. Del Drago,6 6 the Supreme Court of the
United States recognized that the ultimate burden of the federal estate tax is to be determined according to applicable state law. The
Court addressed the intersection of the then-existing federal right of
contribution statute and a New York tax apportionment statute that
allocated the federal estate tax among the estate beneficiaries on a pro
rata basis unless otherwise directed by the decedent's will. The beneficiaries of pre-residuary bequests whose interests were reduced by estate taxes under the New York statute remained disgruntled, as the
Court upheld the constitutionality of the state apportionment statute6 7 and rejected the beneficiaries' argument that Congress created a
burden on the residue rule as a matter of federal law.
In preserving the role of state law addressing estate tax apportionment, the Court failed to embrace the argument advanced by the
beneficiaries that other than as provided by the then existing federal
statute, 6 8 apportionment under state law is precluded. Thus, federal
law did not create a burden on the residue rule and left the issue of
who shall bear the ultimate burden of the estate tax to state law.
62. I.R.C. § 2207A(a)(1).
63. The statutory right of recovery creates a presumption of tax apportionment.
Donna Litman, Apportionment of the Federal Estate Tax - Effect of Selective Federal
Apportionment and Need for Reform, 33 REAL PROP. PROB. & TR. J. 327, 330-31 (1998).
64. Section 2207A(a)(1) contains a burden on the recipient rule.
65. I.R.C. § 2207A(a)(2). The waiver provision language of section 2207A was
amended in 1997. See infra note 169 and accompanying text.
66. 317 U.S. 95 (1942).
67. In Riggs v. Del Drago, The Supreme Court of the United States rejected the
challenge to the New York apportionment statute as violative of the supremacy and
uniformity clauses contained in the Constitution.
68. The predecessor provisions to sections 2206 and 2207 are discussed supra notes
46-48.
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757
THE ADVENT OF STATE APPORTIONMENT STATUTES
The common law approach to the burden of estate taxes was to
treat the taxes like any other estate administration expense. This created a burden on the residue rule that generally imposed the incidence
of the estate taxes on the residuary beneficiaries of the probate
69
estate.
Under the United States Supreme Court's ruling in Riggs v. Del
Drago,70 state law generally determines the ultimate impact of the
incidence of federal estate taxation. Unhappiness with the common
law burden on the residue rule 71 and empowered by Riggs, many
states legislatures enacted apportionment statutes to equalize the tax
burden among those interests contributing to the estate tax liability.
These statutes typically recognized that both probate and non-probate
assets were taxable, and therefore each should be responsible for a
share of the tax. Although the statutes create a default apportionment regime, the statutes permitted the decedent to prevent the statute from applying by contrary provision in the governing instrument.
Therefore, the statutes preserved the freedom of the decedent to provide an alternative scheme from that contemplated by the state apportionment statute.
Of increasing concern is the degree of specificity required for the
decedent to negate statutory apportionment or defeat apportionment
to non-probate assets. For example, a question arose whether a will
directing "payment of all taxes on all property which I may own at the
time of my death" would properly allow the executor to obtain pro rata
contribution from the beneficiaries of decedent's non-testamentary interests. 7 2 Apportionment to the non-testamentary transfers was applicable as the tax clause in the will was found to refer solely to the
testamentary or probate estate. Therefore, as construed by the Court,
the clause is an example of a partial apportionment 73 result - one that
favored the pre-residuary transfers without shifting the entire tax
burden to the residue - with both non-probate assets and the residue
bearing the ultimate tax burden.
69. This presumes that applicable state law does not recognize apportionment by
statute or judicial decision.
70. 317 U.S. 95 (1942).
71. The burden on the residue rule favors specific devises and bequests over residuary dispositions even though all of such property may be included in the gross estate
for purposes of calculating the estate tax. This rule may also be seen as favoring nonprobate assets by charging the taxes attributable to the non-probate property to the
residuary estate.
72. Trimble v. Hatcher's Estate, 173 S.W.2d 985 (Ky. Ct. App. 1943) (discussing
the executors' claim of a ratable recovery from donees of gifts that were required to be
included in the decedent's gross estate).
73. See infra notes 81-87, 119-23, 142-45, 180 and accompanying text.
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As the courts have recognized, there is a strong presumption in
favor of statutory apportionment. A general tax clause should not
serve to validly override the tax apportionment to non-probate assets.
The tax clause in the governing instrument should not necessarily be
recognized as constituting a direction to control apportionment.
Rather than providing a basis to ignore apportionment created by applicable state law, a tax provision failing to mention estate taxes
74
should be deemed ineffective to shift the apportioned tax burden.
That is not to say the inclusion of estate taxes in the tax clause will be
sufficient to control the apportionment. Suppose the will contained
the following direction: "All estate taxes shall be paid out of the residue of my estate." The explicit reference to estate taxes remains part
of the general provision for the payment of taxes and has a boiler plate
flavor to it. The direction fails to mention whether non-probate property is contemplated or that such property is not responsible for the
corresponding taxes attributable to it.
IV.
UNIFORM ACTS AND THE RESTATEMENT (THIRD) OF
PROPERTY (WILLS AND OTHER DONATIVE
TRANSFERS)
The provisions of the Uniform Estate Tax Apportionment Act
("UETAA") have been incorporated into the Uniform Probate Code
("UPC") at UPC sections 3-9A-101 to 3-9A-114.7 5 These provisions retain the concept that the decedent's expressed intentions may govern
apportionment of estate taxes. Section 3-9A-103 provides:
(a) Except as otherwise provided in subsection (c), the following rules apply:
(1) To the extent that a provision of a decedent's will expressly and unambiguously directs the apportionment
of an
76
estate tax, the tax must be apportioned accordingly.
The "otherwise directed" exception for overriding mandated apportionment is replaced with an "expressly and unambiguously directed" exception. While the decedent may direct tax apportionment,
the statutory language, as amplified by the commentary, makes it
clear that such "direction will not control the apportionment of taxes
unless it explicitly refers to the payment of an estate tax and is specific and unambiguous as to the direction it makes for that pay74. See discussion infra section IV dealing with Uniform Act and Restatement
(Third) Property (Wills and Other Donative Transfers).
75. UNIF. PROBATE CODE §§ 3-9A-101 to 3-9A-114 (amended 2006), 8 U.L.A. __
(Supp. 2009).
76. UNIF. PROBATE CODE § 3-9A-103(a)(1) (amended 2006), 8 U.L.A. 90 (Supp.
2009). Uniform Probate Code section 3-916 (1990) contained the predecessor version.
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ESTATE TAXES ON NON-PROBATE PROPERTY
759
ment."7 7 A failure to comply with section 3-9A-103(a)(1) makes the
statutory apportionment rules applicable because the decedent did not
make "a valid provision as to how estate taxes are to be
78
apportioned."
Although incorporating the narrower and more restrictive language of the "expressly and unambiguously directed" exception seems
to prove that a general pay-all-taxes clause, even one mentioning "estate taxes," is ineffective to shift the taxes attributable to non-probate
assets to the residuary beneficiaries, this may not be the case. The
matter may not be resolved because according to the commentary:
[w]hether other directions of a decedent that explicitly mention estate taxes comply with the UETAA's requirement that
they be specific and unambiguous is a matter for judicial construction. For example, there is a split among judicial decisions as to whether a direction such as "all estate taxes be
paid out of the residue of my estate" is ambiguous because it
is unclear whether it is intended
to apply to taxes attributa79
ble to non-probate assets.
The approach to estate tax apportionment found in the Restatement (Third) of Property (Wills and Other Donative Transfers) ("Restatement") does not fully track the UPC. The Restatement declines
to follow the view of the common law burden on the residue rule imposing the entire tax liability on the probate estate. 80 Rather than
charging the whole tax liability on the residue of the probate estate,
the Restatement apportions the estate taxes attributable to non-probate assets among the non-probate property so that they pay their
proportionate share of the estate tax liability and also imposes the es77. UNIF. PROBATE CODE § 3-9A-103(a)(1) cmt. (amended 2006), 8 U.L.A. 91 (Supp.
2009). The commentary also provides the following:
For example, a testamentary direction that "all debts and expenses of and
claims against me or my estate are to be paid out of the residuary of my probate
estate" is not an express direction for the payment of estate taxes and will not
control apportionment. While an estate tax is a claim against the estate, a
will's direction for payment of claims that does not explicitly mention estate
taxes is likely to be a boiler plate that was written with no intention of controlling tax apportionment. To protect against an inadvertent inclusion of estate
tax payment in a general provision of that nature, the UETAA requires that
the direction explicitly mention estate taxes.
On the other hand, a direction in a will that "all taxes arising as a result of
my death, whether attributable to assets passing under this will or otherwise,
be paid out of the residue of my probate estate" satisfies the UETAA's requirement for an explicit mention of estate taxes and is specific and unambiguous as
to what properties are to bear the payment of those taxes.
78. UNIF. PROBATE CODE § 3-9A-103(a)(1) (amended 2006), 8 U.L.A. 92 (Supp.
2009).
79. Id.
80.
RESTATEMENT (THIRD) OF PROPERTY (WILLS AND OTHER DONATIVE TRANSFERS)
§ 1.1 cmt. g (1999). The rejected view imposes liability on the residuary estate except to
the extent that state or federal law, or the decedent's will, provide otherwise. Id.
760
CREIGHTON LAW REVIEW
[Vol. 43
tate tax liability from probate assets on the taxable part of the residuary estate81
V.
CASELAW DEVELOPMENT
A.
STATE LAW APPORTIONMENT CASES
The Supreme Court of New Hampshire was called upon to construe the scope of the tax clause in its In re Crozier'sEstate8 2 decision.
The opening clause of Annie Crozier's ("Crozier") will directed the executor to pay all debts, funeral expenses, administration expenses,
and inheritance taxes out of her estate as soon as practicable.8 3 The
court was required to determine whether state and federal estate
taxes were to be paid out of the residue of Crozier's estate. At the time
of its decision, New Hampshire was one of three states to have
84
adopted the Uniform Estate Tax Apportionment Act ("UETAA").
Under the statute, death taxes were to be apportioned among the decedent's beneficiaries "unless the will otherwise provides." The court
broadly construed the will provision directing payment of "inheritance
taxes out of my estate."8 5 Although New Hampshire had enacted an
apportionment statute, the tax payment clause in the will, though
stated to be "artless and ambiguous," was held to be "an effective provision against apportionment of death taxes."8 6 Rather than apportioning the tax liability pursuant to the statute, ultimate liability for
the estate tax payment was shifted to the residuary estate.8 7 In a subsequent case, the New Hampshire Supreme Court held that where the
will instructed the executor to pay "any and all inheritance taxes...
from the residue," the language failed to alter the state apportionment
for the federal estate taxes but was sufficient to shift the burden of
81. The view adopted in this Restatement is that, unless the decedent's will provides otherwise, liability for estate taxes is "equitably apportioned," meaning that a proportionate part of the estate tax burden is placed on non-probate assets that are
includible in the taxable estate. That is to say, assets not forming a part of the decedent's probate estate but nevertheless includible in his or her taxable estate abate proportionally to pay the federal estate tax liability owed by the estate. Within the probate
estate, however, the full burden falls on the taxable portion of the residue, or if the
residue is entirely nontaxable, on the general or pecuniary devises, and is not apportioned among general and specific devises. § 1.1 cmt. g. Some commentators and courts
would refer to the Restatement view as adopting partial apportionment. The Restatement also contains elements of equitable apportionment to the extent that non-taxable
assets would be exonerated from having any tax liability.
82. 201 A.2d 895 (N.H. 1964).
83. In re Crozier's Estate, 201 A.2d 895, 895-96 (N.H. 1964).
84. Crozier, 201 A.2d at 896. The court noted that Michigan and Wyoming were
the two additional states to have enacted the uniform act.
85. Id.
86. Id. at 897.
87. The phrase "inheritance taxes" indicated an intention both to include estate
and inheritance taxes as well as having these items paid from the residue of the estate.
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ESTATE TAXES ON NON-PROBATE PROPERTY
761
state succession taxes on jointly held property to the residue.8 8 The
residuary beneficiaries were charged with those taxes ordinarily
charged to the recipients of the property.
Shortly after the Crozier decision, the Wyoming courts similarly
determined whether a will provision was a sufficient directive against
89
apportionment of federal estate taxes and state inheritance taxes.
In In re Estate of Obgurn,90 the first article in the will stated "I direct
the payment of all my just debts, taxes, funeral expenses and expense
of administration of my estate." Virtually all courts have found that to
override statutory apportionment, the will or other controlling instrument must plainly state the directive in clear and unambiguous language. 9 1 In Ogburn, the Supreme Court of Wyoming importantly
stated that "a sufficient tax clause should expressly state (1) what
taxes
gifts or beneficiaries are freed of the burden of taxes, (2) what
92
are affected, and (3) where the burden of taxes is shifted."
The Ogburn court could not commend the provision as "a model
directive against apportionment" and found it to be "a superficial, artless, and inept expression." 9 3 Even though the court in Ogburn criticized the provision, recognized the language's ambiguity, and called
for an expression of clear and unambiguous intent not to apportion, as
was the case in Crozier, the Ogburn court nonetheless found the
clause a sufficient mandate against apportionment. 94 As a result, the
court determined the will language sufficient to shift the estate taxes
on the property passing under the will, that is, the probate property,
to the residue, but the language was insufficient to shift the taxes attributable to the insurance proceeds and other property not controlled
by the will. 95 In reaching its conclusion, the court stated the term "my
88. In re Robbins Estate, 356 A.2d 679 (N.H. 1976). The court found it "doubtful
that either the testatrix or the scrivener gave any specific thought to the (federal estate
tax) but in any event the will uses no language sufficient to show an intention to change
the statutory incidence of the tax as provided by [the New Hampshire apportionment
statute]." Robbins, 356 A.2d at 681.
89. In re Estate of Ogburn, 406 P.2d 655 (Wyo. 1965).
90. 406 P.2d 655 (Wyo. 1965).
91. Ogburn, 406 P.2d at 657. See Johnson v. Hall, 392 A.2d 1103, 1106 (Md. 1978).
92. Ogburn, 406 P.2d at 658 (quoting 28 AM. JuR. Inheritance, Estate, and Gift
Taxes § 488).
93. Id. at 658.
94. Id. at 658, 660. The language was an effective directive against apportionment
of federal estate taxes upon the pre-residuary bequests and devises (the property passing by will) but was insufficient to shift the tax burden to the residuary estate for estate
taxes on decedent's non-probate property (insurance proceeds) and state inheritance
taxes. Id. at 660-62.
95. Id. at 660-61. This point of limiting the scope of the tax clause to probate property recognized by the Ogburn court was articulated as early as 1939 by the court in
Chase Nat'l Bank of City of New York v. Tomagno, 14 N.Y.S.2d 759 (N.Y. Sup. Ct.
1939), where it stated "a provision in a will that all taxes be paid out of the residuary or
general estate applies only to property passing under the will unless it specifically re-
CREIGHTON LAW REVIEW
[Vol. 43
estate" referenced the probate estate. Further, the court emphasized
the absence of any reference to non-testamentary gifts, insurance beneficiaries, or proceeds. 96 As to state inheritance taxes, the clause
failed to shift the burden of these taxes to the estate, and the recipients of the gifts remained liable. 97 The court relied upon the inherent
distinction between an estate tax and an inheritance tax by stating
that the "all my ... taxes ... of my estate" language did not refer to
9s
the decedent's taxes nor taxes imposed on the decedent's estate.
While apportionment schemes preserve the ability of the decedent
to designate tax responsibility, the courts in both Crozier and Ogburn
criticized the tax clause provisions and yet allowed the provisions to
defeat estate tax apportionment. These courts improperly rejected estate tax apportionment because they failed to follow the rule that the
tax apportionment rules are to be observed absent expression in the
will clearly and unambiguously indicating a contrary intent.
In Johnson v. Hall,99 two pre-residuary beneficiaries of specific
bequests under the will opposed a pro-rata apportionment of federal
estate taxes among all the beneficiaries. They contended the will directed payment of the taxes from the residuary estate.' 0 0 Dr. Johnson's will, in relevant part, stated "FIRST: I direct that [all] estate and
inheritance taxes, be paid as soon after my death as can lawfully and
conveniently be done."' ° '
The state apportionment statute applied to federal and Maryland
estate taxes "[e]xcept as otherwise provided in the will." 10 2 While recognizing that the majority of courts faced with similar tax clauses concluded against apportionment, the Court of Appeals of Maryland
aligned itself with the minority of courts that concluded such language
failed to clearly and unambiguously indicate that the statute directing
apportionment should be ignored. 10 3 In so doing, the court rejected
fers to other property, and has no effect upon inter vivos dispositions, which for one
reason or another are drawn into the gross estate for tax purposes. Tomagno, 14 N.Y.S
2d at 761. See also Reynolds v. Reynolds, NP 2006-0063, 2007 W.L. 1108554 (R.I.
Super. Ct. 2007) discussed infra at note 144.
96. Ogburn, 406 P.2d at 660-61.
97. Id. at 661-62.
98. Id.
99. 392 A.2d 1103 (Md. 1978). At the time of the Johnson v. Hall decision, Maryland, along with five other states, had adopted the 1964 revisions to the Uniform Estate
Tax Apportionment Act. Id. at 1106, n.5.
100. The legatees were advancing the argument for the common law burden on the
residue rule to apply.
101. Johnson v. Hall, 392 A.2d 1103, 1107 (Md. 1978).
102. Johnson, 392 A.2d at 1106 (discussing MD. CODE, EST. & TRusTs §11-109(k),
recodified at MD. CODE, TAX-GEN. § 7-308(k) (West 2002 & Supp. 2009)).
103. Id. at 1108.
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ESTATE TAXES ON NON-PROBATE PROPERTY
763
the contention that the residuary estate generates the funds to pay
the taxes attributable to bequests to the legatees.
In concluding that the tax provision did not direct against apportionment, the court criticized those decisions in the majority as "not
soundly reasoned" and noted the "boiler plate" language did not come
within the apportionment statute's exception. By apportioning estate
taxes among the recipients of the property, the court recognized that
the inheritance and estate taxes are charged to the parties receiving
the gifts. In rejecting the legatees' argument that the decedent did not
intend apportionment, the court found the decedent included the payment clause, together with another clause giving the executor the
power to pay expenses in the payment clause from either real or personal property, to override the common law abatement rules requiring
the executor to use personalty in the residue prior to the use of realty
10 4
to discharge debts, expenses, and taxes.
10 5
In Ferrone v. Soffes,
the testator died owning probate and nonprobate property. At issue was the apportionment of estate taxes generated by the property held as joint tenants with rights of survivorship. The will directed the executor to pay "all estate, inheritance,
succession and transfer taxes which may be assessed by reason of my
death. 10 6 The District Court of Appeal of Florida affirmed the trial
court's conclusion that the clause was insufficient to avoid application
of the Florida apportionment statute. The court found the clause ambiguous because the will did not contain "clear and unequivocal" direction that the estate be charged with the estate taxes on property
passing outside of the will. The statute governed in the absence of
10 7
unequivocal language in the will.
The Florida legislature, in amending Florida Statute section
733.817108 in 1997, partially codified the result in Ferrone regarding
the elements that a governing instrument must contain in order to
direct that property passing under the instrument bear the taxation
burden for property not passing pursuant to the governing
instrument. 109
104.
105.
106.
107.
108.
109.
Id. at 1110.
558 So.2d 146 (Fla. Dist. Ct. App. 1990).
Ferrone v. Soffes, 558 So. 2d 146, 147 (Fla. Dist. Ct. App. 1990).
Ferrone, 558 So. 2d at 147.
FLA. STAT. ANN. § 733.817 (West 2005).
FLA. STAT. ANN.§ 733.817(5)(h)(4) (West 2005) provides:
For a direction in a governing instrument to be effective to direct payment
of taxes attributable to property not passing under the governing instrument
from property passing under the governing instrument, the governing instrument must expressly refer to this section, or expressly indicate that the property passing under the governing instrument is to bear the burden of taxation
for property not passing under the governing instrument. A direction in the
governing instrument to the effect that all taxes are to be paid from property
CREIGHTON LAW REVIEW
[Vol. 43
Montana has a statutory scheme for the apportionment of state
inheritance taxes. n 0 Although the statute places the burden of the
inheritance tax on the recipients, the statute permits the decedent to
shift the burden and apportion the tax differently if the decedent's will
provides otherwise. The Supreme Court of Montana considered the
apportionment statute in the In re Estate of Morris' decision. The
relevant tax clause directed the personal representative to pay "all
taxes both State and Federal which become payable by reason of my
death, out of my estate."" 2 The lower court, relying on Ogburn, determined the will insufficient to alter the burden on the recipient rule
under the statute with respect to the state inheritance tax. 113 The
lower court further relied on Ogburn in finding insufficient intent to
bypass the apportionment of state inheritance taxes because state inheritance taxes are not taxes on the decedent's estate, but rather are
taxes on the recipient of property. However, the Montana Supreme
Court reversed, noting that unlike the Ogburn clause, the clause in
the instant case specifically referred to "state" taxes which language
was missing from the clause in Ogburn. Thus, by reasoning that inheritance taxes become payable as a result of death, the Morris court
concluded that the "state taxes which become payable by reason of
death" language was sufficient to include state inheritance taxes.
Therefore, the burden of the state inheritance taxes was shifted from
the recipients to the residuary estate.
In permitting the tax burden shift from where the statute placed
it, the Morris court overlooked the legislative intent to change the
common law rule that obligated the residuary estate to pay estate
taxes. The court failed to adopt the express reference approach utilized by the court in In re Estate of Gordon," 4 dealing with estate
taxes on qualified terminable interest property ("QTIP") trust property. The Morris court exonerated the recipients from their share of
the inheritance taxes even though the will clause failed to expressly
refer to apportionment, non-apportionment, or the state inheritance
statute." 5 The Ferrone court required an express reference or express indication before allowing the burden of taxation to be
passing under the governing instrument whether attributable to property passing under the governing instrument or otherwise shall be effective to direct the
payment from property passing under the governing instrument of taxes attributable to property not passing under the governing instrument.
110. MONT. CODE ANN. § 72-16-603 (2009).
111. 838 P.2d 402 (Mont. 1992).
112. In re Estate of Morris, 838 P.2d 402, 404 (Mont. 1992).
113. According to the lower court, the will clause may have been sufficient to shift
the tax liability for federal estate taxes to the residuary estate.
114. 510 N.Y.S.2d 815 (N.Y. Sur. Ct. 1986).
115. Morris, 838 P.2d at 405.
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ESTATE TAXES ON NON-PROBATE PROPERTY
765
shifted.1 1 6 The benefit to such an approach is that the decedent provides abundantly clear evidence that the decedent not only considered
the matter but also made a deliberate decision concerning the impact
of taxes.1 1 7 The express language requirement can serve as a catalyst
to minimize or even prevent the ever-present search for the decedent's
intent regarding tax apportionment.1 1 8 Cases where the testator's
wishes are fully or definitely expressed in the will avoid difficult
problems of proof concerning intent.
In In re Estate of Shoemaker,'1 9 Charles Shoemaker ("Shoemaker") died testate and his assets at the time of his death included
non-probate property in the form ofjoint tenancy property. 120 His will
contained a tax clause that provided "Paymentof Taxes. I direct that
all federal estate and inheritance taxes of every kind and nature, shall
be paid from the residue of my estate." 12 1 In concluding that the will
clause was insufficient to defeat the statutory apportionment and that
the taxes attributable to the joint tenancy property passing outside of
the will should not be paid by the estate, the Court of Appeals of Kansas stated:
[T]he failure to specifically mention the non-probate or nontestamentary property in the tax clause indicates that the
testator did not intend for the estate to pay the inheritance
1 22
taxes on the joint tenancy property.
The court further supported its conclusion by finding that a direction to pay all taxes from the residue of the estate is presumed to apply only to the property disposed of in the will, that is, testamentary
property. 123
The decisions in Chase National Bank of City of New York v.
Tomagno, 124 Ogburn, and Shoemaker recognize the partial apportionment concept. A general tax clause charging all taxes to the residuary
116. Ferrone, 558 So. 2d at 147.
117. Id. The court's approach is consistent with and promotes those cases that "set
a clear direction of requiring a testator to evince a desire to avoid generally applicable
apportionment methods by so stating in highly specific and unambiguous terms." Estate of Swallen v. Commissioner, 98 F.3d 919, 924 (6th Cir. 1996) and cases cited
therein. See also Reynolds v. Reynolds, NP 2006-0063, 2007 W.L. 1108554 (R.I. Super.
Ct. 2007) cited infra note 144 and accompanying text.
118. See In re Estate of McClaran, 811 So. 2d 799 (Fla. Dist. Ct. App. 2002). In this
regard it should be noted generally that there can be problems proving testator's intent
so that resolving the intent question is not trouble free. Belt v. Oppenheimer, Blend,
Harrison & Tate, Inc., 192 S.W.3d 780, 783 (Tex. 2006) (noting the problems associated
with allowing extrinsic evidence to prove the testator's intent).
119. 917 P.2d 897 (Kan. Ct. App. 1996).
120. In re Estate of Shoemaker, 917 P.2d 897, 898 (Kan. Ct. App. 1996).
121. Shoemaker, 917 P.2d at 898.
122. Id. at 900.
123. Id.
124. 14 N.Y.S.2d 759 (N.Y. Sup. Ct. 1939).
CREIGHTON LAW REVIEW
[Vol. 43
estate favors specific and general bequests over the residue with respect to the taxes attributable to testamentary assets but leaves the
taxes on assets held in non-probate form subject to apportionment.
In 1987, the Texas legislature recognized that it was one of just
ten states that failed to have some form of estate tax apportionment. 12 5 Under the former regime, one would look to the probate estate for payment of estate taxes. As a result, unless the decedent
provided otherwise, assets passing under the will bore the full burden
for estate taxes while the non-probate assets were spared.126 Apportioning estate taxes among the beneficiaries, probate and non-probate,
would provide a fairer method more in line with the probable intent of
the testator. 12 7 In enacting Texas Probate Code section 322A 128 and
its system of equitable apportionment, the legislature believed statutory apportionment would provide certainty when allocating estate
taxes between probate and non-probate assets.129 Consistent with
other apportionment jurisdictions, a Texas decedent may supplant the
125. H.R. 508, 70th Leg., Reg. Sess. (Tex. 1987).
126. The residuary beneficiaries would be responsible for the entire tax burden
while the other beneficiaries would bear none of the burden.
127. H.R. 508, 70th Leg., Reg. Sess. (Tex. 1987). As noted by a commentator, the
"system disregards distinctions between probate and non-probate transfers, and assesses the tax liability directly against the takers of all property which is subject to the
estate tax. Moreover, the testate classifications of gifts as specific, general, pecuniary or
residual are now meaningless for purposes of assessing the tax burden." Cenatiempo,
1987 Legislative Changes to the Payment of Death Taxes and other Charges Against a
Decedent's Estate, State Bar Newsletter, Real Estate, 26 Probate and Trust Law No. 1/2
(October 1987/January 1988).
128. TEX. PROB. CODE ANN. § 322A (Vernon 2003 & Supp. 2009).
129. H.R. 508, 70th Leg., Reg. Sess. (Tex. 1987). As originally enacted Texas Probate Code § 322A(b)(1) (1987) provided:
(b)(1) Unless otherwise provided in the will of a decedent, the representative shall charge each person interested in the estate a portion of the estate tax
assessed against the estate. The portion of the total estate tax that is charged
to each person interested in the estate must represent the same ratio as the
taxable value of that person's interest in the estate bears to the total taxable
value of the interests of all persons interested in the estate.
Law of June 20, 1987, ch. 742, § 322A, 1987 TEX. SESS. LAw SERv. 742 (West) (amended
1991 & 2003). In 1991 the section was amended to provide as follows:
(b)(1) The representative shall charge each person interested in the estate
a portion of the total estate tax assessed against the estate. The portion of each
estate tax that is charged to each person interested in the estate must represent the same ratio as the taxable value of that person's interest in the estate included in determining the amount of the tax bears to the total taxable
value of all the interests of all persons interested in the estate included in determining the amount of the tax. In apportioning an estate tax under this subdivision, the representative shall disregard a portion of the tax that is
apportioned under the law imposing the tax, otherwise apportioned by federal
law, or apportioned as otherwise provided by this section.
TEx. PROB. CODE ANN. § 322A(b) (Vernon 2003 & Supp. 2009).
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ESTATE TAXES ON NON-PROBATE PROPERTY
767
statute by a provision in the governing instrument addressing appor1 30
tionment of estate taxes.
In Peterson v. Mayse, 13 1 the Court of Appeals of Texas addressed
whether the testator had, contrary to the default apportionment statute, indicated an intent to charge the residuary estate for all estate
taxes arising from the inclusion of probate and substantial non-probate property 13 2 in the taxable estate. The tax clause in question directed the executor to pay any death taxes from the residuary estate.
Death taxes were defined to include "all estate, inheritance, and succession taxes . . . which are assessed by reason of my death .... ,,133
The Peterson court held the tax clause to be a sufficient directive
under the statute to exonerate the non-probate assets from the burden
of estate taxes. The court reached its holding despite noting that (1)
apportionment of death taxes among both probate and non-probate assets is the general rule; (2) the trend in the law is to require nonapportionment directives to be specific in exonerating non-probate
property; (3) the will did not expressly exonerate the decedent's nonprobate property; and (4) drafting the tax clause to expressly exonerate the non-probate assets would be an improvement over the language used.13 4 The court, though mentioning the stricter "specific
direction" language contained in the amended statute, appeared to
emphasize the more lenient "provides otherwise" standard to support
its decision to have the will control rather than apportioning estate
taxes to the non-probate property as directed by the statute.
The Peterson decision can be criticized for failing to find the tax
clause ambiguous. By charging all estate taxes payable by reason of
death against the residuary probate estate, the testator's tax clause
language is equally consistent with merely exonerating his pre-residuary dispositions. Because of this ambiguity, the default apportionment provisions should apply to the tax treatment of the remaining
non-probate property.
130.
Texas Probate Code 322A(b) provides, in part,
(2) Subdivision (1) of this subsection does not apply to the extent the decedent in a written inter vivos or testamentary instrument disposing of or creating an interest in property specifically directs the manner of apportionment of
estate tax or grants a discretionary power of apportionment to another person.
A direction for the apportionment or nonapportionment of estate tax is limited
to the estate tax on the property passing under the instrument unless the instrument is a will that provides otherwise.
TEx. PROB. CODE ANN. § 322A(b) (Vernon 2003 & Supp. 2009).
131. 993 S.W.2d 217 (Tex. App. 1999).
132. Non-probate assets comprised 72% of the gross estate. Peterson v. Mayse, 993
S.W.2d 217, 219 n.3 (Tex. App. 1999).
133. Peterson, 993 S.W.2d at 220.
134. Id. at 221-22.
CREIGHTON LAW REVIEW
[Vol. 43
Too often the tax clause language utilized has a generic, boilerplate quality to it. This problem was noted by the United States Court
of Appeals for the Sixth Circuit in Estate of Swallen v. Commissioner,13 5 and likewise, in the case of In re Will of Adair 3 6 by the
Supreme Court of New Jersey. 137 In Swallen, the clause provided:
I further direct my Executor to pay from the residue of my
estate, or from funds available to my Executor from other
sources, all inheritance, succession or estate taxes, that may
be lawfully levied by reason of my death upon the inheritance
of, succession to or transfer of all property which may be in8
cluded in my estate .... 13
In Adair, the tax payment provision stated:
All estate, inheritance, succession and other death taxes,
including any interest or penalties thereon, imposed or payable by reason of [Mrs. Adair's] death with respect to all property comprising his [sic] gross estate for death tax purposes,
whether or not such property passes hereunder, shall upon
the written request of the Personal Representative of [Mrs.
Adair's] estate [sic] be paid to such Personal Representative
... out of the principal of the trust estate. The Trustee shall
not be responsible for the determination of such taxes, nor
shall the Trustee be required to determine or inquire into the
availability of funds for such purposes from [Mrs. Adair's]
139
probate estate.
As general pay-all-taxes clauses, both courts determined the provisions were insufficient to exonerate the non-probate property from
40
paying its pro rata share of the taxes.1
The proper apportionment of estate taxes has recently been litigated in Rhode Island. Its version of the UETAA requires the tax be
apportioned among all persons interested in the estate "unless the will
provides." 14 1 In Reynolds v. Reynolds, 14 2 Charles Reynolds ("Reynolds") executed a will and directed his executor to "pay all my just
debts, funeral expenses and expenses of administration, including as
an expense of administration, all estate, legacy, succession and inheri135. 98 F.3d 919 (6th Cir. 1996).
136. 695 A.2d 250 (N.J. 1997).
137. Estate of Swallen v. Commissioner, 98 F.3d 919, 924 (6th Cir. 1996); In re Will
of Adair, 695 A.2d 250, 256 (N.J. 1997).
138. Estate of Swallen, 98 F.3d at 922.
139. In re Will of Adair, 695 A.2d, 250, 254-55 (N.J. 1997).
140. Although the language in Adair specified property whether or not passing
under the instrument, the provision was still characterized as boilerplate.
141. R. I. GEN. LAWS § 44-23.1-2 (2005).
142. No. NP 2006-0063, 2007 W.L. 1108554 (R.I. Super. Ct. 2007).
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ESTATE TAXES ON NON-PROBATE PROPERTY
769
tance taxes." 14 3 Upon his death, more than $1.6 million in non-probate property passed to his children from a prior marriage. These
children and Reynolds's surviving spouse disputed who was responsible for paying the estate taxes. The surviving spouse argued that the
taxes were to be apportioned under the applicable apportionment statute while the children took the position that the will provided for the
estate taxes to be paid from the estate without apportionment. Therefore, the will directive was sufficient to burden the residuary estate
with all of the estate taxes, including the taxes attributable to the
non-probate assets.
In deciding whether the tax clause was sufficient to relieve the
non-probate assets from their proportionate share of the estate taxes,
the Reynolds court noted that the "overwhelming majority of jurisdictions . ..have held that a directive against apportionment should be
expressed in clear and unambiguous language." 14 4 Finding that the
clause neither precluded apportionment nor required the residue to be
the primary source for payment of the estate taxes, the court reasoned
that before determining whether the tax clause constituted a direction
against apportionment, it was necessary first to determine whether
the clause covered the property passing outside of the will. As the tax
clause neither expressly relieved the children nor mentioned the nonprobate property, there was no clearly expressed intent to include
non-probate property. Therefore, the estate taxes generated from the
property passing to the children outside of the will were apportioned
under the statutory command contained in the apportionment
145
statute.
B.
FEDERAL STATUTORY APPORTIONMENT CASES
With federal enactment of a rule permitting the surviving spouse
to shift the burden of estate taxes on the qualified terminable interest
property ("QTIP") trust from the trust remaindermen to the surviving
spouse's estate, litigation followed to determine whether the spouse
had in fact otherwise directed by will. Would a general tax clause providing that all estate taxes payable as a result of the surviving
spouse's death be paid from the residuary estate waive the right of
recovery and constitute a direction against apportionment to the QTIP
property?
143.
2007).
144.
145.
Reynolds v. Reynolds, No. NP 2006-0063, 2007 W.L. 1108554 (R.I. Super. Ct.
Reynolds, No. NP 2006-0063, 2007 W.L. 1108554.
Id.
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[Vol. 43
In In re Estate of Gordon146 the Surrogate's Court for New York
County, New York held that the surviving spouse's estate could recover from the trust remaindermen estate taxes attributable to the
QTIP trust created by the decedent's late husband. The tax clause in
Gordon's will, which the court characterized as a formbook example of
a tax exoneration clause, stated:
I direct that all Estate inheritance and death taxes (including
any interest and penalties) imposed by any jurisdiction by
reason of my death with respect to any property includable in
my estate for the purpose of such taxes, whether such property passes under or outside my will be paid out of my Residuary Estate as an administration expense, without
apportionment. 147
Despite the broad language contained in the tax clause, the provision did not, according to the court, contain specific language sufficient to constitute an "otherwise direction" under Internal Revenue
Code ("IRC") section 2207A(a)(2) 148 to exonerate the remaindermen
beneficiaries of the QTIP trust from contributing their share of estate
taxes. 149 As a result, taxes were apportioned to the QTIP trust.
In In re Estate of Miller,150 Miller left the residue of his estate in
trust for his wife for her life. 15 1 The trust qualified for the QTIP marital deduction for his estate. The tax clause in his wife's will provided
as follows: "I direct my Personal Representative . . .to pay all of my
legal debts . . .without reimbursement or contribution, all estate
taxes, inheritance taxes, death taxes and succession duties assessed
by reason of my death ... ."152 A dispute arose concerning whether
the taxes should be paid out of the estate or the QTIP trust.
In Miller, the Appellate Court of Illinois applied a different analysis than did the court in Gordon. The Miller court concluded that the
plain and ordinary meaning of the tax provision required the estate
taxes attributable to the QTIP trust be paid out of the estate even if
that meant that the estate would be exhausted. 153
Whether a clause in the QTIP trust income beneficiary's will
waived the claim to reimbursement for estate taxes attributable to the
146. 510 N.Y.S.2d 815 (N.Y. Sur. Ct. 1986).
147. In re Estate of Gordon, 510 N.Y.S.2d 815, 817 (N.Y. Sur. Ct. 1986).
148. I.R.C. § 2207A(a)(2) (2006).
149. Gordon, 510 N.Y.S.2d 815, 819. The basis for requiring express mention of a
QTIP trust is the presumption that most testators do not intend to apply a general tax
exoneration clause to QTIP property.
150. 595 N.E. 2d 630 (Ill. App. Ct. 1992).
151. In re Estate of Miller, 595 N.E. 2d 630 (Ill. App. Ct. 1992).
152. Miller, 595 N.E. 2d at 631.
153. Id. at 633.
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ESTATE TAXES ON NON-PROBATE PROPERTY
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trust once again was addressed in the In re Will of Cooney 1 54 decision.
Article I of the surviving spouse's will contained a general pay-alltaxes clause as follows: "I also direct my personal representative to
pay expenses of administration of my estate and all valid inheritance
and estate taxes payable by reason of my death, including any interest
or penalties, without seeking reimbursement from or charging any
person therefor."1 55 For the Supreme Court of Wisconsin the issue
was whether, pursuant to section 2207A(a)(2), the clause "otherwise
direct[ed]" that the surviving spouse's estate shall pay the estate taxes
resulting from inclusion of the QTIP trust in the surviving spouse's
estate. Although applicable statutory law contained no requirement
making specific reference to the QTIP trust, relying in part on Gordon,
the court concluded that the tax clause, as a general direction to pay
all taxes from the estate, was not sufficient to shift the tax burden
from the QTIP trust beneficiaries to the survivor's estate in the absence of a clear and specific indication of testamentary intent. Without the necessary specificity, the tax burden was left where the law
placed it. 1 5 6 According to the general view, specific will provisions relating to the payment of taxes are necessary "if it is intended that the
tax burden should fall differently than as provided by law." 157 Importantly, the "requirement of specificity decreases the potential for tax
clause ambiguity and makes resort to extrinsic evidence to reveal intent unnecessary, thereby alleviating uncertainty for fiduciaries in the
administration of trusts and estates." 158 The specific reference requirement also prevents inadvertent waivers of the section 2207A(a)
1 59
right to recover against the trust beneficiaries.
In discussing the pay-all-taxes clause language and finding
against exoneration of the trust beneficiaries, the Cooney court noted
that the clause did not contain express language limiting payment of
taxes to taxes on testamentary property. Nevertheless, the court
found the provision limited to taxes payable on such testamentary
property rather than more broadly encompassing non-probate property as well. 160 Therefore, the clause was insufficient to shift the bur154. 541 N.W.2d 467 (Wis. 1995).
155. In re Will of Cooney, 541 N.W.2d 467, 469 (Wis. 1995).
156. Cooney, 541 N.W.2d at 474 (citing In re Estate of Joas, 114 N.W.2d 831, 833
(Wis. 1962)).
157. Id. (citing In re Estate of Bauknecht, 182 N.W.2d 238 (Wis. 1971)).
158. Id.
159. Id. at 472 n.4.
160. Id. at 475. In this regard, the Cooney court noted In re Estate of Miller, 595
N.E. 2d 630 (Ill. App. Ct. 1992) as construing similar language failing to include any
specific reference to nevertheless require the estate to pay the estate tax on the QTIP
property but declined to follow it as formulaic and inconsistent with applicable case law
governing shifting the burden of taxation. Cooney, 541 N.W.2d at 473.
CREIGHTON LAW REVIEW
[Vol. 43
den of estate taxes attributable to the QTIP trust from the trust to the
decedent's estate.
The Court of Appeals of Indiana applied Florida law in In re Maurice Jones Trust 16 1 to determine who was the proper party to pay estate taxes upon a QTIP marital trust included in the surviving
spouse's gross estate. At issue in the case was whether the wife, as
surviving spouse, intended for her estate to pay the estate taxes on the
QTIP trust established by her predeceased husband. In relevant part
her will stated:
I direct that all estate, inheritance, succession and other
death taxes of any nature, together with any interest and
penalties thereon, which may be levied or assessed by reason
of my death, by the laws of any State or the United States,
with respect to property passing under this Will or any other
property, shall be considered a cost of administration of my
estate, and that such taxes, together with all debts which I
am legally obligated to pay at the time of my death, my last
illness and funeral expenses and costs of administration of
my estate, (including the cost of a suitable monument at my
grave), shall be paid out of my residuary estate without
apportionment .... 162
In comparing the clause to the mere "direction to pay" clause
found in Ferrone v. Soffes, 163 the court recognized the more expansive
language utilized but still found the clause an insufficient direction to
reflect an intention to shift the tax burden, as required by section
2207A(a)(2), from the recipients of the QTIP trust assets, the source of
payment of the estate tax, to the estate. The clause was susceptible to
more than one interpretation. The section 2207(A)(a)(1) right of recovery prevented the wife from having the legal obligation to pay the estate taxes on the QTIP assets. The phrase "which I am legally
obligated to pay" created an ambiguity because the wife was not legally obligated to pay the estate taxes attributable to the QTIP trust
assets and, therefore, was not directing the payment of taxes attribu164
table to those assets.
The holdings in Gordon and Cooney are aligned and consistent
with those cases concluding that a pay-all-taxes provision that fails to
make reference to non-probate property is insufficient to shift the es161. 637 N.E.2d 1301 (Ind. Ct. App. 1994). Florida law applied as the wife was a
Florida resident, died in Florida, and her will was executed in Florida. In re Maurice
Jones Trust, 637 N.E.2d 1301, 1304 (Ind.Ct. App. 1994).
162. Jones Trust, 637 N.E.2d at 1304.
163. 558 So. 2d 146 (Fla. Dist. Ct. App. 1990).
164. Id. at 1304-05.
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ESTATE TAXES ON NON-PROBATE PROPERTY
773
tate tax burden from such property to the probate estate. 16 5 They also
stand for the recognized proposition of "an expressed reluctance to
shift tax burdens in the absence of a clear and specific indication of
testamentary intent." 16 6 With regard to QTIP trusts and section
2207A(a)(2), there are cases contrary to Gordon and Cooney construing similar tax clause language, even without any reference to the
QTIP trust, as sufficient to otherwise direct against apportionment to
the QTIP trust beneficiaries.1 67 However, Gordon and Cooney reflect
the majority rule requiring explicit reference to QTIP trusts in tax ap16 8
portionment clauses.
In 1997, recognizing that cases held contrary to the decisions in
Gordon and Cooney, Congress amended the waiver provision contained in section 2207A(a)(2). 16 9 To make the provision more stringent than originally enacted, Congress replaced the "otherwise
directs" language, and the section now states:
(2) Decedent may otherwise direct. - Paragraph (1) shall
not apply with respect to any property to the extent that the
decedent in his will (or a revocable trust) specifically indicates an intent to waive any right of recovery under this subchapter with respect to such property.170
The amendment's legislative history stated that the "bill provides
that the right of recovery with respect to QTIP is waived only to the
extent that language in the decedent's will or revocable trust specifically so indicates (e.g., by a specific reference to QTIP, the QTIP trust,
section 2044, or section 2207A)" and that "a general provision specifying that all taxes be paid by the estate is no longer sufficient to waive
the right of recovery." 17 1 Consequently, the amendment narrowed the
requirements and demanded more explicit language before courts will
find a directive against apportionment.
165. The contrary view is that such a clause is sufficient to shift the tax burden on
non-probate property to the probate estate notwithstanding the fact that the tax clause
is silent regarding non-probate property. See Maurice T. Brunner, Annotation, Construction and Effect of Will Provisions Expressly Relating to the Burden of Estate or
Inheritance Taxes, 69 A.L.R.3d 122, 269-72 (1976)
166. Cooney, 541 N.W.2d at 473.
167. See In re Estate of Klarner, 113 P.3d 150 (Colo. 2005), Miller, 595 N.E.2d 630
(Ill. App. Ct. 1992); In re Will of Adair, 695 A.2d, 250 (N.J. 1997) and infra note 171.
168. See Estate of Vahlteich v. Commissioner, 69 F.3d 537 (6th Cir. 1995); Branch
Banking & Trust Co. v. Staples, 461 S.E.2d 921 (N.C. Ct. App. 1995); Adair, 695 A.2dat
256. See also Klarner, 113 P.3d at 156.
169. Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788.
170. I.R.C. § 2207A(a)(2) (2006) (emphasis added).
171. H.R. REP. No. 105-220 (1997).
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VI.
[Vol. 43
THE PROBLEM AND PROPOSED SOLUTION
As the preceding cases demonstrate, statutory apportionment jurisdictions are inconsistent with regard to the degree of clarity and
specificity required to override the apportionment statute. A frequently litigated concern involves the question of whether the estate
taxes attributable to non-probate property are to be paid from assets
in the probate estate. Many of these jurisdictions seem to require very
little to establish a shift in the tax burden notwithstanding the recognized strong public policy in favor of statutory apportionment. 1 7 2 The
essentially same clause may be found insufficient to shift the burden
from where the statute places it in another jurisdiction. Further,
these state decisions conflict with the applicable standards applied by
the decisions governing federal statutory apportionment. It may be
possible for the courts to eliminate these inconsistencies to better support and bolster apportionment principles. However, rather than relying on the courts, legislatures desiring to promote and strengthen the
equitable apportionment rules thought to have been enacted may need
to amend these statutes to achieve results more consistent with the
policy objectives underlying their original enactment.
Apportioning the estate tax among the beneficiaries of the estate
not only prevents favoring those receiving general and specific bequests, but also avoids undue erosion of the residue,17 3 particularly
when a sizable portion of the estate passes outside of the residue or is
attributable to non-probate property. As a consequence of charging
the taxes entirely to the residue, the testator's dispositive plans may
be frustrated. If the testator's wishes are not consistent with applicable state law allocating the tax burden among all of the recipients of
the estate, including non-probate beneficiaries, clear and specific lan172. In re Estate of Stokley, 166 Cal. Rptr. 587 (Cal. Ct. App. 1980); In re Estate of
Webb H. Coe Marital & Residuary Trusts, 593 N.W.2d 190 (Mich. Ct. App. 1999); In re
Estate of Roe, 426 N.W.2d 797 (Mich. Ct. App. 1988); In re Estate of Gilligan, 668
N.Y.S.2d 656 (N.Y. App. Div. 1998); In re Estate of Schneider, 267 N.Y.S.2d 852 (N.Y.
Sur. 1966); In re Estate of Huffaker, 641 P.2d 120 (Utah 1982).
173. Cases where the residue was depleted include In re Valma Hanson Revocable
Trust, 779 N.E.2d 1218 (Ind. Ct. App. 2002); In re Estate of Passoff, 819 A.2d 26 (N.J.
Super. Ct. Ch. Div. 2002); Rosen v. Wells Fargo Bank Texas, N.A., 114 S.W.3d 145 (Tex.
App. 2003). See also Estate of McManus, 140 Cal. App.3d 62, (Cal. Ct. App. 1983); In Re
Estate of Kyreazis, 701 P.2d 1022 (N.M. Ct. App. 1984); In re Estate of Jones, 796 A.2d
1003 (Pa. Super. Ct. 2002). In Emmertz v. Cherry, 520 S.E.2d 219 (Ga. 1999), the court,
citing In re Will of Cooney, noted that its pay-all-taxes provision did not authorize payment of taxes on non-probate property out of estate's residuum where nothing in will
indicated testator's awareness of non-probate property and payment of taxes on such
property would deplete residuum, thereby thwarting testator's bequests to charity. In
re Will of Cooney, 541 N.W.2d 467 (Wis. 1995). See In re Estate of Armstrong, 366 P.2d
490 (Cal. 1961) (taxes were apportioned rather than payable entirely from the probate
estate where the death taxes on probate and non-probate assets exceeded the value of
the probate estate).
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775
guage is required to constitute an appropriate direction contrary to
the default rule. By requiring such language, courts can safely conclude that the testator not only considered and addressed the issue
but also made decisions about how the taxes would be charged.
The initial point of inquiry needs to be whether the language utilized identifies the source from which payment of the tax should be
made. A general direction that taxes be paid, even coupled with a designated source such as the residuary estate, may be insufficient to
shift the allocation of the tax obligation. Language in the will specifying the residue as the source of payment does not clearly and expressly establish that the residuary estate should be charged with all
taxes without regard to the probate nature of the property. Before
non-probate property transferees are exonerated from the payment of
taxes and overcome applicable tax apportionment rules, the tax clause
must contain language sufficient to include non-probate property.
Without a clearly expressed intent to embrace non-testamentary property, the will fails to provide for the payment out of the residue for
1 74
taxes attributable to property passing outside of the will.
Judicial decisions addressing apportionment of estate and inheritance taxes have been inconsistent in following the legislative directive that apportionment of these taxes is required unless the will
clearly and specifically directs otherwise. Rules applicable to estate
tax proration contain an exception to allow for the decedent to execute
a contrary directive. Numerous cases have cited the proposition that a
directive must be clear and unambiguous to alter the apportionment
statute and shift the tax burden from those upon whom the statute
places it. 17 5 As numerous decisions call for apportionment of estate
taxes when the will provision is ambiguous, it is urged that such an
ambiguity exists with general pay-all-tax clauses charging the residue
of the probate estate. As previous cases amply demonstrate, one interpretation is that the estate taxes on both probate and non-probate assets are to be paid from the residuary estate. However, where the
clause fails to include non-probate property, other decisions limit the
taxes payable from the residuary estate to those amounts attributable
to the probate property and require the balance of any taxes to be apportioned among the non-probate property. In this manner, because
174. While insufficient to shift the allocable tax burden on non-probate property to
the residue, the clause would be sufficient to shift the burden on property passing under
the will to the residue, thereby exonerating general and specific bequests.
175. In re Estate of Stokley, 166 Cal. Rptr. 587 (Cal. Ct. App. 1980); In re Estate of
Kelly, 584 P.2d 640 (Colo. App. 1978); In re Estate of Webb H. Coe Marital & Residuary
Trusts, 593 N.W.2d 190 (Mich. Ct. App. 1999); In re Estate of Roe, 426 N.W.2d 797
(Mich. Ct. App. 1988); In Re Estate of Kyreazis, 701 P.2d 1022 (N.M. Ct. App. 1984); In
re Estate of Schneider, 267 N.Y.S.2d 852 (N.Y. Sur. 1966); In re Estate of Ogburn, 406
P.2d 655 (Wyo. 1965).
CREIGHTON LAW REVIEW
[Vol. 43
the clause is susceptible to more than one interpretation, courts
should follow established precedent regarding ambiguities and resolve
17 6
the matter in favor of the partial apportionment.
Because of the recognized policies favoring estate tax proration in
the caselaw, the willingness of the courts to broadly apply the exception may seem surprising and even perplexing. Notwithstanding the
recognized strong public policy in favor of statutory apportionment,
many of these jurisdictions require very little to establish a shift in the
tax burden. The inconsistency may spring from the exception contained in the apportionment statute. Therefore, the source of the
problem may be the statute itself. The inconsistency may arise from
the "otherwise directed" or "provided otherwise" exception to the apportionment rules. This statutory language contributes to courts trying to ascertain the decedent's intent by construing other provisions of
the will beyond the tax clause. Some courts then find these general
pay-all-tax clauses insufficient to defeat the apportionment statutes,
while other courts take a far more lenient approach to construing their
apportionment statutes, thus finding the statutes overridden and
therefore inapplicable. Before courts find these general boilerplate or
form book clauses sufficient to impose the entire tax burden attributable to probate and non-probate assets on the residuary probate estate
- a result that fails to further the purposes of the apportionment statutes - more specific and precise language should be required.
Absent an explicit direction, a general pay-all-taxes clause included in a will should not include taxes attributable to property that
does not pass under the will. By requiring more explicit language,
courts can be certain that the decedent had the intent and made the
deliberate decision to shift the tax burden on such property.
Consistent with the strong policy in favor of statutory apportionment, courts have recognized that before they can ignore the legislative scheme under tax apportionment statutes, the will or other
governing instrument must plainly state the intention not to apportion. 177 This in turn establishes a framework for analysis. Consequently, "in a tax allocation problem the text of the will is to be
scanned only to see if there is a clear direction not to apportion; and if
such [e]xplicit direction is not found, construction of text ceases be1 78
cause the statute states the rule."
Before proceeding with an inquiry into whether the tax clause in
the governing instrument is a specific, clear, and unambiguous direc176. See supra notes 24, 174 and accompanying text.
177. Johnson v. Hall, 392 A.2d 1103 (Md. 1978).
178. Johnson, 392 A.2d at 1107 (citing In re Mill's Estate, 64 N.Y.S.2d 105, 110
(N.Y. Sur. Ct. 1946)).
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tive against statutory apportionment, at least one court has articulated the importance of initially determining whether the tax clause
embraces the property for which tax exoneration or relief is sought. 179
For example, the court would first review the tax clause to determine
the requisite intent to relieve non-probate taxable assets from their
proportionate burden of death taxes. Because of the need for more
clarity and precision in drafting, a will provision that "all taxes" or "all
estate, inheritance, transfer, or death taxes" be paid out of the residuary or general estate would be too general under this approach. The
above language broadly addresses the type of taxes covered and even
designates the fund from which these taxes are to be paid. The clause
would be adequate for the residuary probate estate to bear the burden
of estate taxes on property passing under the will.' 8 0 Importantly,
however, the will clause remains insufficient to exonerate non-probate
property because there is neither express or specific reference to property that does not pass under the will nor a direction for payment
whether or not the property generating the taxes passes under the
will.
If courts remain unwilling to require the degree of particularity
suggested above for the "otherwise directed" exception, it will be up to
the legislatures to strengthen the apportionment statutes by amending them to require more unequivocal language to prevent the statute
from governing. As amended, the statutes would replace the "otherwise directed" exception with an "expressly indicated" exception.
Thus, the tax clause would need to expressly indicate that property
passing under the will should be used to pay taxes on property passing
outside the will. The exception, as modified, preserves the ability of
the decedent to provide for non-apportionment and, importantly,
would be more consistent with the shift from a burden on the residue
179. Reynolds v. Reynolds, No. NP 2006-0063, 2007 W.L. 1108554 (R.I. Super. Ct.
2007).
180. In general, a "pay all taxes out of the residuary estate" clause applies only to
probate property. Chase Nat'l Bank of City of New York v. Tomagno, 14 N.Y.S.2d 759
(N.Y. Sup. Ct. 1939). With regard to a tax clause directing payment of all estate and
inheritance taxes from the residuary estate, the court in In re Estate of Shoemaker, 917
P.2d 897, 900-01 (Kan. Ct. App. 1996) recognized:
A provision for paying 'all federal estate and inheritance taxes of every
kind and nature" from the residue of the estate is presumed to apply only to the
property disposed of in the will, unless a wider meaning is clearly expressed.... Only by such clear reference to nontestamentary property can the
statutory apportionment be defeated.
See Reynolds discussed supra note 142 and accompanying text; Ogburn discussed supra
note 89 and accompanying text. There would be partial apportionment since the residue would bear the burden as to probate property and the recipients of the non-probate
assets would be responsible for a proportionate share of the taxes attributable to these
assets that pass outside of the will.
CREIGHTON LAW REVIEW
[Vol. 43
rule to a burden on the recipient rule - a purpose underlying the enactment of apportionment statutes in the first instance.
An express language requirement would promote and require better drafting of documents. Further, testators would need to address,
contemplate, and make informed decisions about the manner in which
the tax burden will be shared. Moreover, as one court has recognized,
an express language requirement would minimize the number of cases
in which courts must search for the intent regarding apportionment of
81
taxes.
Provisions of federal and state statutory apportionment rules
have been amended in a number of instances to address the requisite
clarity necessary for applying the exception to the default apportionment system. In general, these amendments require greater precision
by making the exception subject to more stringent standards. These
statutory approaches provide a useful roadmap for those jurisdictions
desiring to strengthen their general rule of estate tax apportionment.
Several states have already taken the lead and addressed the concern regarding the sufficiency of directions contrary to applicable apportionment. Whether property passing under the governing
instrument is to bear the burden of taxation for property not passing
under the governing instrument is of critical importance. These
states' statutory language requires greater clarity and particularity of
language in the governing instrument before the burden of taxation is
shifted from where the statute places it.
In Oregon, although the statute retains the "otherwise directed"
exception, the statute also provides that a "mere testamentary direction to pay debts, charges, taxes or expenses of administration shall
not be considered a direction against apportionment of estate
82
taxes."'
Maryland has adopted statutory apportionment with an exception
based on the weaker "otherwise provided" language.' 8 3 However, despite the relaxed contrary direction exception provision, Maryland
caselaw has aligned with the stricter view requiring explicit language
stating the intention for non-apportionment. 18 4 In aligning itself with
those courts following a stricter standard for avoiding estate tax ap181. In re Estate of McClaran, 811 So.2d 799, 802 (Fla. Dist. Ct. App. 2002).
182. OR. REV. STAT. ANN.§116.313 (West 2003).
183. MD. CODE ANN., TAX-GEN. §7-308(k) (West 2002 & Supp. 2009).
184. Johnson v. Hall, 392 A.2d 1103 (Md. 1978); Gordon v. Posner, 790 A.2d 675
(Md. Ct. Spec. App. 2002). In Johnson,the court of appeals aligned itself with the selfdescribed small minority of courts requiring explicit language to constitute a direction
that the residuary estate fund the payment of estate taxes. As the will language failed
to establish an intent not to apportion and opt out of statutory apportionment, the estate taxes were charged to the beneficiaries named in the will rather than be charged
solely to the residuary estate.
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ESTATE TAXES ON NON-PROBATE PROPERTY
779
portionment, the approach adopted by the Maryland court prevents
inadvertent alteration of the tax apportionment rules.
California and Florida have also rewritten their estate tax proration exceptions to contain a more rigorous test before apportionment is
bypassed. Before amendment, the California proration statute made
an exception "where a testator otherwise directs in his or her will." 18 5
California now provides for an exception to the equitable proration of
federal and state estate taxes but does so without utilizing more relaxed and lenient "otherwise directed" language. The exception in the
California Probate Code provides:
(b) This section does not apply:
(1) To the extent the decedent in a written inter vivos or testamentary instrument disposing of property specifically directs that the property be applied to the satisfaction of an
estate tax or that an estate tax be prorated to the property in
the manner provided in the instrument. As used in this paragraph, an "instrument disposing of property" includes an instrument that creates an interest in property or an
amendment to an instrument1 that
disposes of property or cre6
ates an interest in property. 1
The current exception replacing the "otherwise directs" language
of the former exception was rewritten in 1987 to "apply only where
'the decedent in a written . . .instrument . . .specifically directs' a
particular method of payment or proration." 18 7 In light of these
amendments, and reaffirming the general rule of estate tax apportionment under the statute, a California court has recognized that "the
narrow but firmly based policy now expressly stated in the proration
statute" takes precedence over the more general policy of construction
18 8
to effectuate a testator's intent.
Florida's apportionment statute, Florida Statutes section
733.817,189 containing a complex arrangement for the proration of estate taxes, has been amended several times to address the rules applicable to beneficiaries' responsibility for contributing their
proportionate share of estate taxes. The statutory system may be superseded provided the governing instrument has "effectively directed" 190 or "otherwise directed."' 9 1 This arguably broad language is
narrowed and made subject to more restrictive standards by later
185.
186.
187.
188.
189.
190.
191.
CAL. PROB. CODE § 970, repealed by 1986 Cal. Stat. ch. 783 § 25.
CAL.PROB. CODE § 20110(b)(1) (West 1991) (emphasis added).
In re Estate of Malpas, 9 Cal. Rptr. 2d 806, 809 (Cal. Ct. App. 1992).
Malpas, 9 Cal. Rptr. 2d at 809.
FLA. STAT. § 733.817 (West 2005 & Supp. 2010).
Id. § 733.817(4)(a).
Id. § 733.817(5).
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statutory provisions, particularly with respect to shifting the tax burden on non-probate property to the probate estate. Section
733.817(5)(h)(1) provides:
To be effective as a direction for payment of tax in a manner
different from that provided in this section, the governing instrument must direct that the tax be paid from assets that
pass pursuant to that
governing instrument, except as pro19 2
vided in this section.
Section 733.817(5)(h)(4) contains the narrow and explicit requirement and states:
For a direction in a governing instrument to be effective to
direct payment of taxes attributable to property not passing
under the governing instrument from property passing under
the governing instrument, the governing instrument must expressly refer to this section, or expressly indicate that the
property passing under the governing instrument is to bear
the burden of taxation for property not passing under the governing instrument. A direction in the governing instrument
to the effect that all taxes are to be paid from property passing under the governing instrument whether attributable to
property passing under the governing instrument or otherwise shall be effective to direct the payment from property
passing under the governing instrument of taxes attributable
1 93
to property not passing under the governing instrument.
Even prior to the provisions of the current statute, the Florida
legislature recognized that effective directives against proration in the
governing instrument needed greater specificity. The statute, in relevant part, formerly provided:
A direction against apportionment under this section may be
explicit or implicit from the terms of the governing instrument, but must be clear and unequivocal; provided, however,
that an implicit direction against apportionment is not sufficient to avoid the apportionment under state or applicable
federal law unless the court also finds that the testator considered and made a deliberate
and informed decision about
19 4
the burden of taxation.
State legislatures have not been the only governing bodies perplexed by tax apportionment concerns. Prior to its 1997 amendment,
Internal Revenue Code ("IRC") section 2207A 19 5 allowed a decedent to
192. Id. § 733.817(5)(h)(1).
193. Id. § 733.817(5)(h)(4).
194. FLA. STAT. § 733.817(2)(d), amended by 1997 FLA. LAws ch. 97-240 § 9. This
section is, in part, a codification of the decision in Ferrone v. Soffes, 558 So.2d 146 (Fla.
Dist. Ct. App. 1990). See Trent S. Kiziah & Felix J. Chmiel, Estate Tax Apportionment
Statutory Modification, 67 FLA. B. J. 22 (Feb. 1993).
195. I.R.C. § 2207A (2006).
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ESTATE TAXES ON NON-PROBATE PROPERTY
781
"otherwise direct" the payment of estate taxes attributable to qualified
terminable interest property ("QTIP") assets. 196 In order to exonerate
the QTIP property, the amended section 2207A now requires the decedent do so by specifically indicating the waiver of any recovery rights
against the QTIP property. The amendment effectively codified the
majority rule announced in In re Estate of Gordon19 7 by the Surrogate's Court for New York County, New York. 198 The legislative history to the 1997 amendments instructed that a decedent who makes
specific reference to QTIP, the QTIP trust, IRC section 2044,199 or section 2207A will satisfy the "specific indicat[ion]" exception. 20 0 The
legislative history also stated that a provision that all taxes be paid by
the estate, that is, a general pay-all-taxes clause, will be insufficient to
exonerate the QTIP assets. 20 1 The majority rule under Gordon20 2 and
the current statutory language in section 2207A are consistent with
and support the notion that a general tax clause charging estate taxes
to the residuary estate without making reference to non-probate property, or assets passing outside of the governing instrument, is insufficient to shift the estate taxes on non-probate property to the probate
residuary estate.
QTIP trust cases involving a will direction that all estate taxes be
paid out of the residuary estate would not otherwise provide or direct
so as to exonerate beneficiaries of the QTIP trust from contributing
their share of estate taxes. Those principles relied upon in the QTIP
trust cases apply with equal force to the contention that like clauses
fail to exempt beneficiaries of property passing outside of the will from
payment of their share of the estate taxes.
196. I.R.C. § 2207A(a)(2) provided that "[plaragraph (1) shall not apply" if the decedent otherwise directs by will. In In re Estate of Gordon, 510 N.Y.S.2d 815 (N.Y. Sur.
Ct. 1986), a general pay-all-tax clause that failed to make reference to the QTIP trust
was held to be insufficient to shift the estate tax burden on the QTIP trust to the residuary estate. In In re Estate of Miller, 595 N.E. 2d 630 (Ill. App. Ct. 1992), the court of
appeals applied a less stringent statutory standard to conclude that the pay-all-tax
clause was sufficient under the otherwise directed" exception and exonerated the QTIP
trust. The result in Gordon was followed in In re Will of Cooney, 541 N.W.2d 467, 476
(Wis. 1995). The pay-all-tax clause in the surviving spouse's will did not exonerate the
QTIP trust remainder beneficiaries because the clause did not expressly mention or
refer to the QTIP trust. The court interpreted the clause to refer to taxes payable only
on the transfers made in the will. Cooney, 541 N.W.2d at 475.
197. 510 N.Y.S.2d 815 (N.Y. Sur. Ct. 1986).
198. See Gordon discussed supra note 146.
199. I.R.C. §2044 (2006)
200. H.R. REP. No. 105-148 (1997).
201. Id.
202. In re Will of Adair 695 A.2d, 250, 256 (N.J. 1997) recognized Gordon as stating
the majority rule.
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CONCLUSION
Through either statutory enactment or judicial decision, applicable law in most states follows the principles of apportionment of estate
taxes. Within these rules, however, the decedent is permitted to alter
the tax liability scheme from that provided under the default rules.
Rules calling for the apportionment of estate tax liabilities, whether
by statute or caselaw, may be circumvented or bypassed by appropriate provisions in the will or other controlling instrument. Following
the majority rule, most courts have stated that general pay-all-tax
clauses in the governing instrument are sufficient to indicate the decedent intended to make provision for the payment of estate taxes contrary to the applicable estate tax apportionment rules. An
unfortunate consequence of this approach is property passing under
the will, for example probate property or assets, becomes the source of
payment for property passing outside of the will, for example non-probate property. By interpreting the direction to the executor to include
payment of estate taxes on property not passing under the will, taxes,
which otherwise applicable apportionment rules attribute to the nonprobate assets, diminish the probate estate.
The call to pay-all-taxes from the residue may have been a sufficient expression of intent to avoid apportionment among the probate
assets, thereby freeing the pre-residuary bequests and devises from
sharing in the estate tax burden. However, it may be too great a leap
to conclude that the same clause avoids sharing of the tax burden between non-probate assets and the residuary probate estate. These
general tax clauses should not be interpreted to contain a specific contrary direction exonerating the recipients of non-probate assets from
paying a portion of the tax. Greater specificity should be required to
circumvent statutorily or judicially required sharing of the ultimate
burden of estate taxes.
Charging the residue with the payment of estate taxes indicates
an intent that specific bequests should not bear any portion of the estate tax, but this charge is an insufficient direction to preclude using
applicable apportionment rules on those assets passing outside of the
will.
Designating the source of payment as the residuary does not automatically shift the burden of taxation on non-probate property from
the recipients to the residuary estate. It may have been written without any intention of controlling the apportionment of estate taxes on
property passing outside of the will.
The pay-all-tax clause is too general to negate application of apportionment rules mandating that estate taxes be shared pro rata by
the recipients of property included in the decedent's taxable estate.
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Moreover, rather than constituting a clear and unambiguous statement, these clauses reveal an ambiguity because whether they are intended to apply to the estate taxes attributable to non-probate assets
is unclear. Therefore, precedent supports the application of the state
20 3
apportionment statute.
While a decedent may alter the applicable apportionment scheme,
this Article argues that the language in a pay-all-taxes clause, being
too general and, at best, ambiguous, is insufficient to shift the estate
tax burden from where the applicable apportionment rules place it.
The better approach is to require express or more specific language in
the tax clause constituting a direction sufficient to burden the residuary estate for estate taxes regarding the non-testamentary property.
The virtues of this option include decreasing the potential for tax
clause ambiguity and eliminating the need to resort to extrinsic evidence to search for testator's intent as to tax apportionment. These
benefits remove uncertainty in the estate administration process and
thus will assist fiduciaries.
Application of the more stringent standard exists under the federal tax statute in the context of estate taxes attributable to the inclusion of qualified terminable interest property ("QTIP") trust assets in
the estate of the surviving spouse. Moreover, the majority of courts
reached this result under the then applicable statute's original language permitting the governing instrument to "otherwise direct."
Unfortunately, the majority of courts faced with the question have
not extended the QTIP analysis to other non-probate assets. There is
some indication from the cases that the problem for some courts may
stem from the statutory language authorizing the decedent to trump
the applicable apportionment rules by providing a different method of
apportioning estate taxes and "shift the tax burden from those upon
whom the statute imposes it." 20 4 Courts may be reticent to apply the
stricter standard urged in this Article if the applicable state statute
merely provides in a less stringent manner for the decedent "to direct
203. Brunetti v. Comm'r, 56 T.C.M. (CCH) 580 (1988). See supranote 24 and accompanying text.
204. In re Estate of Morris, 838 P.2d 402, 405 (Mont. 1992). In In re Estate of
Klarner, the court noted a material difference between the state statute and the federal
statute. 113 P.3d 150, 155 (Colo. 2005). The statute did not contain the federal language to require the decedent to "specifically" indicate an intent to waive apportionment
but rather merely provided decedent to "direct a method of apportionment different
from that described in the statute." Klarner, 113 P.3d at 155.
According to the dissent in Johnson v.Hall, had the statute used the stricter standard
of requiring the intention to be "expressly indicated" or "specifically provided" rather
than the less rigid language of "providing otherwise," the dissent would have agreed
with the analysis contained in the majority decision. 392 A.2d 1103, 1113-14 (Md. 1978)
(Murphy, J., dissenting).
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or provide otherwise." 20 5 Perhaps the fault lies with the statutory
language. By creating a too lenient threshold to evaluate the decedent's tax clause direction in the governing instrument, legislatures
may have inadvertently simplified the ability to override the default
apportionment standard. If this is the case, applicable estate tax apportionment statutes should be strengthened by replacing statutory
language enabling the decedent "to direct or provide otherwise" with a
requirement that the governing instrument expressly or specifically
indicate that the residue of the probate estate be responsible for and
charged with the payment of estate taxes on property passing outside
of the will.
There are judicial and legislative solutions to the problem of
charging the residuary probate estate with responsibility for payment
of the estate taxes on non-probate assets. The courts should be more
vigilant in the apportionment context by interpreting the directive exception more stringently and restrictively.
A general pay-all-taxes clause does not contain the higher standard of clarity required for a decedent's clear and unambiguous expression to opt out of the pro rata sharing of estate tax liability for
non-probate property. If the higher standard is not met, the recipients
of the non-probate assets should be responsible for their fair share of
the ultimate incidence of taxation. Where the decedent fails to adequately state that the property passing outside of probate is exonerated from the tax burden, these non-probate assets should remain
subject to their pro rata share of estate tax liability.
To date, too few courts have been willing to exact this called for
level of precision and have allowed ambiguous language in the governing instrument to serve as a direction against apportioning any estate tax liability to non-probate property. In recognition of this
practice, the solution may need to shift from the courts to the legislature to restore the fundamental principles underlying applicable apportionment doctrine. If the courts are otherwise unwilling to refrain
from too broadly interpreting the general pay-all-taxes clauses, legislatures should intervene and consider statutory amendments that
strengthen apportionment rules. With this alternative solution, guidance already exists. These statutory amendments aimed at
strengthening should be patterned following the federal lead of Congress in Internal Revenue Code section 2207A(a)(2) or by looking to
the states of Florida and California.
205. But see Gordon and Johnson, supra notes 146 and 99 and accompanying text
respectively (giving examples of decisions declining to find the tax clause as sufficient
under the more lenient language).