Our firm has an extensive estate planning practice. Most clients are of the opinion that the “standard” form of will and trust provisions will adequately serve their needs, and no special inquiries or changes need be made. That is not always the case, as the beneficiaries of the estate of Robert Lurie learned.
Robert Lurie was a wealthy and successful Chicago businessman who died in 1990. Many years prior to his death he established various trusts for the benefit of his children. Because he had control over these trusts they were includable in his taxable estate. The assets in these trusts totaled $40,000,000. At the same time his other taxable assets governed by his will and trust totaled approximately $92,000,000; his wife was the primary beneficiary of these assets.
Robert Lurie’s will directed that the taxes assessed by reason of his death be paid from his residuary estate. His living trust contained a “standard” debts and taxes clause which provided that his trustee shall pay “ . . . all income, estate, inheritance, transfer and succession taxes . . . without reimbursement . . . from . . . any other person.”
The estate took the position that the estate taxes on the children’s trusts were payable from the children’s trusts, resulting in an estate tax of $22,000,000, and that all other property passed to the surviving spouse free of estate tax because of the marital deduction. That position was consistent with the Illinois equitable apportionment law, which provides estate tax be paid from the assets generating the tax.
The IRS took the position the estate taxes were payable from the residuary estate, resulting in an estate tax of $47,500,000. This result occurred because the estate tax is paid on the property used to pay the estate tax.
The IRS prevailed, based upon the explicit language of Robert Lurie’s will and trust. The payment of an additional $25,000,000 of estate tax as a result of his death, as opposed to later on, at the time of his wife’s death, probably caused Robert Lurie to turn over in his grave. He could have avoided this result by modifying the “generic, boilerplate provisions” of his estate plan documents dealing with tax apportionment.
Many clients have certain assets they desire to leave to different heirs. As an example, parents working in their business may want to leave that business, usually held in their own names or in their living trusts, the disposition of which is governed by their will or trust, to children who are working in that business. In an attempt to benefit their children equally, they leave other assets – assets that are customarily passed outside a will and trust, by beneficiary designation, like an IRA or insurance proceeds, or assets held in joint tenancy – to the children who are not working in the business.
Unless the parents change the standard provision that calls for payment of estate taxes from the residuary estate to an apportionment of taxes to those assets that generate the tax, they and the children may suffer the result that all of the estate taxes will be paid by the children working in the business and not the children who are the beneficiaries of assets that are passing outside the will and trust. Depending on the size of the taxable estate and the amount of taxes, the children working in the business may be required to sell the business, or leverage its assets, to generate the funds to pay the tax. It is unlikely this result was intended.
To avoid unintended results, each and every provision of a will and trust, particularly the “boilerplate” provisions, must be carefully considered and reviewed. Hypothetical scenarios ought to be played out during the estate planning process. Nothing should be left to the imagination or speculation. Otherwise, anything left on the table will be consumed before it gets to the intended beneficiaries.