Estate Tax Apportionment

As we continue to float down the river of no estate tax during 2010, the Wisconsin Supreme Court ruled this morning that the estate (i.e., the personal representative of an estate) and not the direct recipients of estate assets are responsible for paying estate tax liability.  In a case of first impression, the Wisconsin Supreme Court in Estate of Sheppard v. Schleis, et al., ruled that a minor child who received $3.7 million from her grandfather via payable on death (POD) designations was not required to pay any of the estate tax liability associated with her inheritance.  This is a sweet result for her, but a horrible result for the other beneficiaries of the grandfather's estate.  The Supreme Court confirmed the rule of law in Wisconsin.  Unless modified by an estate planning document (e.g., a will or trust), the estate, and not the actual recipients of inheritance dollars, is responsible for paying estate tax.  The next lawsuit will likely be a malpractice action against the drafter of the grandfather's estate plan claiming that the attorney did not adequately address estate tax apportionment.

The opposing party in the case argued for an apportionment of estate tax liability imposed on every beneficiary of the estate based upon how much money each beneficiary inherited.  Unfortunately, this will not be the case in Wisconsin unless the deceased person's will or trust explicitly requires the apportionment of estate tax liability.  To combat this disastrous result, Vogel Law Firm, Ltd., has been including estate tax apportionment clauses in our estate planning documents for nearly 10 years.  A person's will and/or trust must provide that the fiduciary has the authority to seek payment of estate tax liability from each individual beneficiary.  We live in an age where assets commonly pass to beneficiaries by beneficiary designation and we must not be flippant about beneficiary designations, especially with larger estates.

Lastly, people need to be very careful about creating payable on death, transfer on death, and other beneficiary designations. You must keep estate tax liability in mind when creating these designations.