Estate Tax on Non-Probate Property
As you begin to study the property transfer provisions in the will, you immediately detect a similar pattern. The initial articles of the will that you are reviewing make several different dispositions of property. One disposition is a general bequest of cash. Further, the preliminary articles bequeath personal property and thereafter devise the home. The final provision disposes of the balance of the property. Several hundred thousand dollars are owed in estate taxes. The estate tax bill is attributable not only to assets disposed of by the will, known as the probate estate, but also to assets passing outside of the will, or the non-probate estate. Will each asset be responsible for its pro rata share of the taxes, or will certain assets be relieved of the burden of taxation? How the tax liability is shared will undoubtedly create the potential for adversarial relations if certain beneficiaries receive their property free and clear of any pro rata share of tax liability while others bear more than their pro rata share. In this manner, one can readily see how an allocation of tax liability in the tax clause of the governing instrument is most properly viewed as a dispositive provision even if the tax clause is not technically a pre-residuary or residuary disposition.
A long standing tradition exists in this country to impose a tax on property held by the decedent at the time of death. Taxes imposed upon death may take one of two primary forms. An estate tax is levied on the transfer of property by the decedent. The federal estate tax is an example of this form because it is a tax on the right to transfer property. An inheritance tax, in contrast, is imposed on the beneficiaries receiving the property from the estate.
As a wealth transfer tax, the federal estate tax is not limited to those assets disposed of by will or transferred through intestacy. The federal estate tax is imposed on the transfer of probate and non-probate property. By federal statute, the personal representative of the estate has personal liability for the payment of federal estate taxes attributable to the probate and non-probate property.
Few tax lawyers and estate planners would contest the notion that a will should address how any estate taxes owed are to be paid and by whom. Charging the taxes solely to the assets passing under the will achieves a very different outcome compared to apportioning the taxes to all beneficiaries of the decedent’s wealth, including those receiving assets passing outside of the will.