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Saturday, August 08, 2009

POP QUIZ - FLORIDA APPORTIONMENT

BACKGROUND FACTS:

Decedent dies, and his estate is subject to federal estate taxes. Part of his taxable estate assets pass under his Last Will and through his probate estate, and part of the assets consist of life insurance that passes outside of the probate estate. Thus, part of the federal estate taxes are attributable to the life insurance.

Florida law provides that the default allocation and apportionment of estate taxes is that the recipient of insurance and other nonprobate assets pay their share of the estate taxes attributable to those nonprobate assets, absent a proper allocation of those taxes to probate property.

The decedent's Last Will provides:

"I direct my Personal Representative TO PAY OUT OF THE property which would otherwise become a part of the RESIDUARY ESTATE, ALL ESTATE, inheritance, transfer and succession TAXES, including interest and penalties thereon, WHICH MAY BE LAWFULLY ASSESSED BY REASON OF MY DEATH. I WAIVE on behalf of my estate ANY RIGHT TO RECOVER any part of SUCH TAXES, interest or penalties FROM any person, including ANY BENEFICIARY OF INSURANCE on my life and anyone who may have received from me or from my estate any property which is taxable as part of my estate." (emphasis added)


Fla.Stats. § 733.817(5)(h)(4), relating to when a direction in a Last Will to pay taxes on nonprobate property from probate property will be respected, provides:

"For a direction in a governing instrument to be effective to direct payment of taxes attributable to property not passing under the governing instrument from property passing under the governing instrument, the governing instrument must expressly refer to this section, or expressly indicate that the property passing under the governing instrument is to bear the burden of taxation for property not passing under the governing instrument. A direction in the governing instrument to the effect that all taxes are to be paid from property passing under the governing instrument whether attributable to property passing under the governing instrument or otherwise shall be effective to direct the payment from property passing under the governing instrument of taxes attributable to property not passing under the governing instrument."

THE QUESTION:

Does the insurance in the decedent's estate bear estate taxes, or will the insurance beneficiaries receive the proceeds tax-free while the probate estate and its beneficiaries have to pay the estate taxes attributable to the insurance?

THE ANSWER:

According to the recently decided appellate case of Boulis v. Estate of Boulis, 34 Fla.L.Weekly D1567b, (4th DCA, August 5, 2009), the tax apportionment clause is NOT effective to shift the taxation of the insurance proceeds to the probate estate, so the insurance beneficiaries will have to bear their share of the estate taxes.

Doesn't the apportionment clause in the Last Will direct to "pay out of the residuary estate...all estate taxes?" Yes, it does. But per Fla.Stats. § 733.817(5)(h)(4), for such a direction to be effective, such a direction must either refer to that section of the law (which was not done in the Last Will), or "expressly indicate that the property passing under the governing instrument is to bear the burden of taxation for property not passing under the governing instrument."

To the appellate court, a direct expression to pay all estate taxes out of the probate estate is not the same as the requisite direct expression to have nonprobate property bear the burden of the estate taxes. Presumably, some direct reference to "nonprobate property" is needed. But wasn't there such a reference when the Last Will expressly provides that the estate waived any right to recover estate taxes from insurance beneficiaries?

Did you get the answer right? Don't be upset if you didn't - reasonable minds clearly will differ on whether the appellate court was correct on this one.

LESSONS TO BE LEARNED:

Don't mess around with apportionment. If you want to have estate taxes paid by the probate estate on nonprobate assets, stick closely to the statutory language. This means either make a direct reference to Fla.Stats. § 733.817(5)(h)(4), or use the "safe harbor" language in that statute ("all taxes are to be paid from property passing under the governing instrument whether attributable to property passing under the governing instrument or otherwise") or something very close to it.

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