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Transfer Tax Apportionment

Connecticut Bar Association Estates & Probate Newsletter, Issue No. 66

May 2010

Authors: Bryon W. Harmon

Wills and trust agreements are sophisticated, complicated documents. As estate planners, we spend much time and intellectual effort crafting formula funding, dispositive, fiduciary and other clauses on behalf of our clients. We may not spend as much time, however, on the tax apportionment clauses in our wills and trusts. Even worse, such clauses in a client’s will and one or more trusts sometimes conflicts or contradict one another. How big of a deal is it? For certain estates, it is not an overstatement to say that such clauses are the single most important provision in the estate planning documents -- and most likely to be either ignored or given only cursory review or examination.

Why are tax clauses (and apportionment generally) so important? Failure to include an appropriate tax clause due to oversight, overreliance on boilerplate provisions, inartful drafting or insufficient appreciation of the nature of assets can lead to disastrous consequences, including disinheritance of intended beneficiaries, increase of aggregate tax liability, and malpractice claims.

Although apportionment is concerned primarily with allocating the burden of a fixed amount of death taxes, it may also affect the amount of tax itself, not merely its allocation.

The modern prevalence of nonprobate dispositions as part of the sophisticated estate plan heightens the importance of addressing tax apportionment questions. In addition, the prevalent use of credit shelter trusts to decrease the overall transfer tax burden highlights the need to carefully plan for the payment of taxes, especially when the decedents’ children are not all related.

To help the practitioner avoid the myriad traps and pitfalls, this article reviews and addresses the rules governing the allocation of the burden of transfer taxes among recipients of gratuitous transfers in wills and trusts. The goal is to impress upon the practitioner the importance of tax clauses, outline the relevant federal and Connecticut law, alert the planner to some common traps and issues and provide some insight on how to avoid such problems.

Notwithstanding the fact that wills and trust agreements often contain direction with respect to the payment of federal and state taxes, practitioners must learn and understand the complex web of federal and state apportionment law.

Unfortunately, there is relative absence of judicial and administrative guidance in this area and the planner is left with piecemeal statutes sometimes pointing the practitioner in different directions.

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