Transfer Tax Payment and Apportionment (Portfolio 834)

Tax Management Portfolio, Transfer Tax Payment and Apportionment, No. 834-2nd, is a study of the law concerning the payment and apportionment of federal and state wealth transfer taxes.

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Tax Management Portfolio, Transfer Tax Payment and Apportionment, No. 834-2nd, is a study of the law concerning the payment and apportionment of federal and state wealth transfer taxes. The portfolio discusses both federal and state law and examines the interplay of those rules with the tax payment provisions contained in wills and other estate planning instruments. The portfolio is designed principally for estate planners, for trust and estate fiduciaries and their counsel, and for lawyers and other professionals involved in both tax and nontax litigation concerning apportionment matters.
Estate planners often overlook transfer tax apportionment issues, relying either on the default rules of state and federal law or on boilerplate tax payment provisions contained in will and trust forms. For several reasons, uncritical reliance often is misplaced. First, in large estates, more property may pass under the tax payment provision of a will or trust than under all of the other provisions combined. Thus, crafting an appropriate tax payment provision is at least as important as the other dispositive elements of a sophisticated estate plan. Second, the prevalence of various nonprobate property interests (such as jointly held property, revocable inter vivos trusts, and retirement benefit plans) means that a substantial portion of the gross estate is not subject to estate administration; failing to apportion taxes to substantial nonprobate assets that generate a portion of the tax bill may bankrupt the probate estate. Third, tax apportionment affects both the relative shares received by estate beneficiaries and, under certain circumstances, the amount of the aggregate tax liability; failing to apportion taxes properly may subject the estate to a larger than necessary wealth transfer tax burden. The portfolio is designed to give planners the tools needed to address these questions with greater care and clarity.
Tax apportionment issues also are profoundly important to fiduciaries. Failing to understand and to implement an apportionment scheme may constitute a breach of fiduciary duty (for example, if a personal representative fails to collect taxes from nonprobate beneficiaries, thus potentially harming probate beneficiaries). A failure to consider apportionment questions also may subject the fiduciary to personal liability to the government (for example, if the fiduciary distributes estate assets based on tax miscalculations, by failing to reduce a marital bequest by taxes properly charged thereto) or to beneficiaries (including nonprobate beneficiaries to whom a portion of the tax liability is apportioned) who are affected by the fiduciary's tax administration. A general misunderstanding of the law in this area and the failure to address apportionment issues properly has spawned litigation in both state and federal courts; indeed, tax payment questions probably constitute the single greatest source of estate planning and administration malpractice in terms of matters litigated. The portfolio provides an exposition of existing apportionment law as well as the author's views relating to interpretative questions on which legal guidance is inadequate.
This portfolio may be cited as Pennell, 834-2nd T.M., Transfer Tax Payment and Apportionment.


Jeffrey N. Pennell

Jeffrey N. Pennell; B.S., Northwestern University (1971); J.D., Northwestern University (1975); Order of the Coif; Executive Editor, Northwestern University Law Review, 1974–75; Attorney, The Northern Trust Company, Chicago, Illinois, 1975–78; Assistant Professor of Law, University of Oklahoma, 1978–81; Visiting Assistant Professor of Law, Southern Methodist University, 1980; Associate Professor of Law, University of Oklahoma, 1981–84; Visiting Adjunct Professor of Law, University of Miami, 1981–93, 1999–present; Professor of Law, University of Oklahoma, 1984–86; Visiting Professor of Law, University of Miami, 1985–86; Director, Graduate Tax Program, 1986–94 and Richard H. Clark Professor of Law, Emory University, 1986–present; member, Advisory Committee of the University of Miami Philip E. Heckerling Estate Planning Institute; faculty member, American Bankers Association National Graduate Trust School; member, American Law Institute; adviser, Restatements of the Law (Third) of Trusts, and of Property (Wills and Other Donative Transfers); former member, Council of the Real Property, Probate & Trust Law Section of the American Bar Association; Academic Fellow and Former Regent, American College of Trust and Estate Counsel; Academician, The International Academy of Estate and Trust Law; Editor-in-Chief, Real Property, Probate & Trust Journal, 1987–89; member, Tax Management Advisory Board on Estates, Gifts and Trusts; author, Income Taxation of Trusts, Estates, Grantors and Beneficiaries (1987), Casner & Pennell, Estate Planning (6th ed. 1996), Pennell, Federal Wealth Transfer Taxation (5th ed. 2009), Pennell, Wealth Transfer Planning and Drafting (2005), Pennell & Newman, Trust and Estate Planning (2d ed. 2009), Pennell & Newman, Wills, Trusts & Estates (3d ed. 2010), 843 T.M., Estate Tax Marital Deduction, various articles and Institute chapters.

Table of Contents

Detailed Analysis

I. Introduction

A. Scope of Portfolio

B. Importance of Topic

1. In General

2. Affects Amounts Received by Beneficiaries

3. Affects Aggregate Tax Liability

a. Charitable and Marital Dispositions

b. Generation-Skipping Dispositions

c. Dispositions Triggering State Inheritance Taxes

4. Fiduciary Liability Concerns

5. Collection of Taxes

C. Apportionment Options and Terminology

1. In General

2. Inside Apportionment

3. Outside Apportionment

4. Equitable Apportionment

5. Apportionment Among Multiple Entities

6. Apportionment of Credits

7. Apportionment of Rate Differentials

8. Apportionment to Temporal Interests

II. Federal Apportionment Rules

Introductory Material

A. Section 2002

B. Section 2205

C. Estate Tax Reimbursement Provisions - Sections 2206 Through 2207B

1. In General

2. Section 2206

3. Section 2207

4. Section 2207A

5. Section 2207B

6. Absence of Comparable Rules for Other Nonprobate Assets

D. GST Tax Apportionment Rule - Section 2603(b)

E. QDOT Tax Payment Rule - Section 2056A(b)

III. State Apportionment Rules

A. Introduction: Silence Generates What Result?

B. Overview of State Approaches

C. Uniform Estate Tax Apportionment Act

1. Introduction

2. Substantive Rules

3. Enforcement Rules

D. State Law Approaches to Specific Tax Apportionment Concerns

1. Equitable Apportionment

2. Apportionment of Inheritance Taxes

3. Apportionment of Fees and Expenses

4. Apportionment of Interest and Penalties

5. Apportionment of Credits

6. Apportionment to Nonprobate Assets

7. Apportionment to Temporal Interests

8. Elective Share Computations

9. Apportionment of Sections 2032A and 2057 Recapture Taxes

10. Conflicting Documents

11. Apportionment to Adjusted Taxable Gifts

12. Apportionment to Phantom Assets

E. Conflict of Laws Concerns

IV. Planning and Drafting for Tax Apportionment

Introductory Material

A. Overriding State and Federal Default Rules

1. In General

2. Interpretative Issues

3. Conflicting Documents

B. Miscellaneous Planning Concerns

1. Waiving Federal Reimbursement Rights

2. Liquidity Concerns Associated With Federal Reimbursement Rules

3. Gift Tax Concerns Associated With Federal Reimbursement Provisions

4. Choosing Pro Rata or Incremental Apportionment

5. Apportionment Concerns Associated With Employee Benefit Plans

6. Administrative Concerns/Order of Payment

7. Using Tax Apportionment to Minimize Spouse's Elective Share

8. Disclaimers and Partial QTIP Elections

9. Section 2035(b) and Other Phantom Assets

10. Apportionment of Credits and Rate Differentials

11. GST Tax Apportionment Concerns

12. Coordination With Section 303 Redemptions

13. Apportionment to Nonprobate Assets

14. Apportionment of Recapture Taxes

15. Apportionment to Temporal Interests

C. Checklist of Planning Choices

V. Liability for Taxes

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 State-by-State Summary of Default Apportionment Rules

Worksheet 2 Sample Tax Clauses for Wills and Revocable Trusts

Worksheet 3 Revised Uniform Estate Tax Apportionment Act (1964)

Worksheet 3A Revised Uniform Estate Tax Apportionment Act (2003)

Worksheet 4 Texas Probate Code § 322A

Worksheet 5 California Probate Code, Division 10. Proration of Taxes



Internal Revenue Code:

Revenue Rulings:



Selected Periodicals: