Estate Tax Apportionment and Probate Code 3-916 Summary

The Uniform Law Commissioners originally addressed estate tax apportionment in 1958. A second act was promulgated in 1962. It became the basis for Section 3-916 of the Uniform Probate Code when it was promulgated in 1969. Amendments were added in 1982. In 2003 this act has been substantially revised as the Uniform Estate Tax Apportionment Act, last revised in 2003, and simultaneously as Part 9A of Article 3 of the Uniform Probate Code.

When the assets of a decedent are subject to either federal or state estate tax, the Uniform Act provides the default rules that determine which shares in the estate will carry the burden of paying the tax and the percentage of the total tax each share will pay. The fiduciary in charge of paying the tax is responsible for making these determinations, whether a trustee of a revocable trust or the personal representative of the decedent managing the probate of the estate. (The older acts did not include revocable trusts.) Problems to be solved include determining and empowering a personal representative to reach assets that are not in the estate because of a non-probate transfer of those assets, allocating burdens to those assets that may be found when other assets that should be available are not, and accounting for assets that are exempt or excepted from estate taxes. The earlier acts did not deal with all of these issues as comprehensively as the 2003 act does, but the objective of these rules from 1958 on has been fair allocation of the tax burden to heirs, legatees and trust beneficiaries, when estate taxes have to be paid.

It must be emphasized that in the new revision as well as all prior versions, these rules apply only if the decedent expressly through a will or trust instrument did not address apportionment of tax liability. That is the why these rules are called "default" rules.

The basic rule in the revised act is that "estate tax is apportioned ratably to each person that has an interest in the apportionable estate." This means that the tax is allocated "pro rata according to the relative values of interests to which the term is to be applied." Each share in the estate represents a percentage of the whole of the taxable estate. The percentage of tax allocates according to the percentage of each share in the whole of the apportionable estate. If there are estate assets which are not in the estate for tax purposes, they will not be counted as part of the apportionable estate. However, those shares that include assets not in the apportionable estate may still have some tax liability, but it will be counted only against the ratable percentage of the apportionable estate.

There are exceptions and special cases that need to be addressed. If an interest in a taxable estate is a time-limited interest (life estate, annuity interest, unitrust interest as examples), the tax is apportioned only to the principal. A special formula allocates the tax upon estate assets that are "qualified terminable interest property" (QTIP) in such a trust by a formula. The formula allocates the difference between the actual estate tax and the amount that would have been allocated if such property had not been included in the taxable estate to the holders of interests in that property, apportioned ratably. QTIP trusts are a special kind of marital trust recognized in federal tax law. A generation-skipping transfer tax incurred on a direct skip taking effect at death of the decedent is charged to the person to which the interest in property is transferred. These are situations in which the rule of apportionment "ratably" to all with interests in the apportionable estate does not exactly apply.

Credits for gift or estate taxes paid are ratably apportioned to all those with interests in the apportionable estate . If payment is deferred for certain properties in an estate, the amount of deferral goes to those whose interests are responsible for the deferral.

A new concept in 2003 is the designation of insulated versus uninsulated property. Insulated property is property subject to a time-limited interest which is included in the apportionable estate, but cannot be used to pay estate tax because of "impossibility or impracticability." An example of this kind of property is a decedent’s nonqualified pension plan which provides payment to a designated beneficiary after decedent’s death until the death of the beneficiary, which triggers a remainder to another person. Though the pension plan assets are in the apportionable estate, other law may cut off the estate’s access to those assets. Since the taxes have to be paid, uninsulated property in the apportionable estate has to be used to pay the tax attributable to the insulated property. The Uniform Act calls for the tax to be advanced ratably from interests in uninsulated property. Those with interests in the uninsulated property have a right of recovery from distributees from insulated property, and the right to obtain a ratable share in property that subsequently becomes uninsulated.

Federal estate tax law allows estate taxes to be reduced by election of lower than market value for certain real estate by heirs or legatees related to the decedent when estate tax is computed. There are also special deductions for "qualified family-owned business interests." Generally, the effect of these reductions in estate tax inure to those whose interests include the property interests for which the reductions are allowed. This is another instance in the 2003 Act of response to tax rules that did not exist when the original acts were promulgated.

Unlike the earlier acts which authorized probate courts or equivalents to collect estate taxes and gave some right of action to personal representatives, the obligation to collect falls fully to the fiduciary in charge under the 2003 Act. The fiduciary may defer distribution of the property until satisfied that payment of taxes has been made and generally control distribution until taxes are paid. The fiduciary is authorized to collect taxes apportioned to or required to be advanced by any person. Whatever is not collectible from a person may be collected from other persons in a statutory order of priority. If a person ends up paying some of another’s apportioned share, there is a right of reimbursement.

These rules bring the law of estate tax apportionment up-to-date, and provide for fairer apportionments than the predecessor acts did. It is important to consider this Act while collection of estate taxes remains relevant.