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Estate tax apportionment. (Estates and Trusts).

A will should state whether the estate tax is to he apportioned among each bequest or paid from the residuary estate. This is particularly important if assets such as life insurance proceeds, IRAs, or pension distributions are passing outside of the estate. An apportionment clause determines which beneficiaries will bear the payment of estate taxes.

One way of apportioning taxes is to have the taxes paid only from the assets passing through the will. Amounts passing outside the will, such as through an IRA or pension plan, will not bear any of the estate taxes. This could substantially reduce bequests made in the will. The other way is to apportion the taxes to all heirs, including those receiving assets outside the will.

If estate taxes are apportioned to IRA and pension plan beneficiaries and funds withdrawn to pay such taxes, the payment of income taxes on those amounts would be accelerated, further reducing the amounts left to those beneficiaries. Likewise, beneficiaries of nonmonetary assets, such as automobiles or artwork, would have to reach into their own funds to pay their share of the estate taxes.

Testators that want to leave fixed sums to specific people should consider whether these amounts should bear any of the estate tax burden. Again, if taxes are not apportioned, the heirs of the residue will have their bequests reduced by taxes.

The Exhibit shows the effects with and without apportionment. The amount of estate tax paid by the beneficiary, where there is apportionment of estate taxes, is in the same ratio as its value to the gross taxable estate. This is different than the calculation for the estate tax income tax deduction for a beneficiary's IRD distribution, which is arrived at by calculating the federal estate tax (after reduction by the state tax credit) with and without the IRD (see the accompanying article, "Income in Respect of a Decedent"). The results for an individual with a marital deduction will be different as well.

The Exhibit assumes 2002 rates and unified credit. This is not an exact calculation of estate taxes; the purpose of the example is to show the effect of apportionment on the residuary estate paying the estate tax.



                                   Residuary estate pays
                                     entire estate tax
                                  Residuary       IRD
                                   estate     beneficiary

IRD account                                   $1,000,000
Other assets net of liabilities  $1,000,000
Estate tax                         $435,000
Net to beneficiary                 $565,000   $1,000,000

                                   Beneficiary pays estate
                                     tax allocated to IRA
                                 Residuary          IRD
                                   estate       beneficiary

IRD account                                     $1,000,000
Other assets net of liabilities  $1,000,000
Estate tax                         $217,500       $217,500
Net to beneficiary                 $782,500       $782,500
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Article Details
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Author:Mendlowitz, Edward
Publication:The CPA Journal
Article Type:Brief Article
Geographic Code:1USA
Date:Sep 1, 2002
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