A properly-prepared estate plan must be based on a thorough analysis of the client’s needs and desires as well as the effect local laws may have on the estate taxes assessed against the estate. The language of one’s will and trust must be clear and unambiguous so as to avoid potential unintended consequences.
Assume the following facts: Mr. Smith, a widower, created a living trust which at the time of his death had a value of $4,000,000. At his death in 2006, he also had $1,000,000 of assets in his own name, so probate administration of those assets was required. Mr. Smith’s will bequeathed one-half of the probate estate to his friend, Ms. Jones. The balance of his probate estate was to be transferred to the trustee of his living trust. Mr. Smith’s will provided that all estate taxes were to be paid by the trustee of his living trust, but made no mention of how the estate taxes would be allocated, or apportioned, between his probate estate and his trust. Mr. Smith’s living trust provided for distribution of the assets to his children.
Absent any specific language relating to the apportionment of the estate taxes between the legatee under Mr. Smith’s will (Ms. Jones) and the beneficiaries of his living trust (his children), the effect of Mr. Smith’s plan is that Ms. Jones would receive $500,000 (one-half of his probate estate) without any reduction for the estate taxes to be paid on the amount Ms. Jones received. The total estate taxes would be paid from the living trust, with the result that the Smith children bear the entire tax burden of their father’s bequest to Ms. Jones.
To avoid this result, Illinois follows the doctrine of “equitable apportionment.” This rule applies only if the decedent’s intent is not clearly stated in his or her estate planning documents. By this doctrine, if there is no clear intent, federal estate taxes will be apportioned between probate and nonprobate assets. By following the doctrine of equitable apportionment, the executor and trustee of Mr. Smith’s estate and trust would be entitled to deduct from Ms. Jones’ bequest an amount equal to her proportionate share of the estate taxes paid with respect to Mr. Smith’s taxable estate.
The issue of apportionment can also arise when the decedent and another person hold title to property as joint tenants with right of survivorship. When the value of joint tenancy property is included in the decedent's gross estate, it can generate a federal estate tax. Because federal estate tax law is silent on the apportionment of whether a surviving joint tenant is liable for the estate tax attributable to property interests received by the surviving joint tenant, state law will determine whether apportionment will apply. Some states would require the estate to pay the tax. Under Illinois law, the tax would be equitably apportioned and the surviving joint tenant would be liable to pay a proportionate share of the estate taxes.
As demonstrated above, equitable apportionment will fairly charge estate taxes among the recipients of one’s assets. The effect of the language in one’s will and trust agreements, as well as the extent of joint tenancy arrangements, must be carefully considered so that the apportionment issues are understood by the client and consistent with the client’s intent. There is no substitute for careful and thorough estate planning. Please telephone us if you have any questions regarding your estate plan.