Illinois and Estate Tax Apportionment

Carleen L. Schreder (Levin & Schreder, Ltd, Chicago) has recently published her article entitled Even More Uncertainty about Estate-Tax Apportionment, 95 Ill B.J. 306 (2007).

Here is an excerpt from her article:

“Estate-tax apportionment.” Three words likely to cause any estate planning attorney to break into a sweat. Why? Because taxes can have a profound impact on an estate, and the estate-tax apportionment provision – which allocates the burden of paying the tax – can have a bigger dollar impact than any other part of a will or trust. What’s more, even if you choose an appropriate tax payment clause based on your client’s knowledge of the facts – including ownership of and beneficiary designations for all assets – those facts are almost certain to change by the time of the client’s death.

Unfortunately, the choice and drafting of estate-tax payment clauses in Illinois has become even more difficult as a result of two cases decided in the last two years, one from the state appellate court and one from the seventh circuit.

In Estate of Williams, the third district held that when a decedent’s will provides for estate taxes to be paid from the residuary estate and waives apportionment against other assets, but the residuary estate is insufficient to pay the taxes, the waiver of apportionment is ineffective with respect to the deficit.  Williams is significant primarily because the court overruled its decision in Estate of Fry * * * and in so doing created a conflict with the fifth district’s decision in Landmark Trust Company v Aitken.

In Lurie v CIR, the decedent had executed a will with estate-tax payment language similar to that in Williams. However, the decedent had also executed a revocable trust that directed payment of estate taxes from its assets without apportionment.

The seventh circuit made two important holdings in Lurie: (1) the language in the “pour-over” will that effectively incorporated the revocable trust by reference governed the payment of estate taxes that exceeded the residuary estate and (2) even without such language in the will, it is proper under Illinois law to consider both the will and revocable trust agreement to determine the decedent’s intent about payment of estate taxes.