Posted on 04/25/2017 at 12:00 AM by Cody Edwards
I’ll make this easy on you. Unlike a law school exam, I’m not going to make you spot the issue. The issue in the following fact pattern is whether Decedent, through the language in her will, waived her right to recovery of estate taxes under Internal Revenue Code § 2207A. As the example below shows, recovery of estate taxes under IRC § 2207A may disproportionately burden and benefit certain beneficiaries of a taxable estate.
Assume the following facts:
Decedent’s husband (“Husband”) dies on January 1, 2000, leaving $5M to his wife (“Decedent”) in a QTIP trust. Under the terms of the QTIP trust, upon the death of Decedent, the trustee of the QTIP trust is directed to withhold that portion of the QTIP trust property that Decedent’s estate is entitled to recover for estate taxes under IRC § 2207A. The trustee of the QTIP trust is directed to distribute one-half of the QTIP trust to each of Husband’s two children upon Decedent’s death.
Decedent’s revocable trust, dated January 1, 2007, directs the trustee to exercise any right of recovery under IRC § 2207A.
Decedent’s will, dated January 1, 2013, provides that the executor shall pay from the residue of the estate all estate and inheritance taxes assessed by reason of her death and that Decedent waives for her estate all right of reimbursement for any estate or inheritance tax paid by the estate.
Decedent dies on January 1, 2017 with a net estate of $8M, consisting of $3M in Decedent’s revocable trust and the $5M QTIP trust. The trustee of Decedent’s revocable trust is directed to distribute the revocable trust to Decedent’s sister.
Decedent did not make any lifetime gifts.
IRC § 2207A(a)(1) allows a decedent to recover estate taxes from the QTIP trust (or beneficiaries of the QTIP trust) that are attributable to the inclusion of the QTIP in the decedent’s estate. IRC § 2027A(a)(2) allows a decedent to waive that right of recovery if the decedent’s will or revocable trust indicates an intent to waive the right of recovery.
The 2017 estate tax exclusion amount is $5.49M (and remember there was not portability of the estate tax exclusion in 2000); thus, Decedent has a taxable estate of $2.51M. With an estate tax rate of 40 percent, Decedent’s estate has a tax liability of $1.004M.
Without Husband’s statement in the QTIP trust that Decedent’s estate can recover estate taxes under § 2207A, assuming pro-rata payment of taxes, Husband’s two children would each pay $313,750 in estate taxes and Decedent’s sister would pay $376,500. However, due to the inclusion of “§ 2207A language” in Husband’s QTIP trust and in Decedent’s revocable trust, Decedent is entitled to recovery under § 2207A. In our case, if Husband’s QTIP trust was not included in Decedent’s estate, Decedent’s estate would not incur an estate tax liability (Decedent’s revocable trust is $3M, which is less than the exclusion amount); thus, the entire estate tax liability is attributable to the QTIP trust and should be recovered by Decedent’s estate. Under § 2207A, Decedent’s estate will recover from the QTIP trust or Husband’s two children $1.004M; Decedent’s sister will pay $0 of the estate tax liability.
Clearly, Decedent’s sister would prefer the trustee to exercise the right of recover under § 2207A, while Husband’s children may be a bit perturbed footing the additional $376,500 in estate tax. Recall that Decedent’s will, which was dated after the Decedent’s revocable trust, requires Decedent to pay all estate and inheritance taxes caused by her death and that Decedent waived all rights to reimbursement; arguably, these provisions waived her right of recovery. Husband’s children may contemplate challenging Decedent’s estate’s right of recovery. Such challenge would be futile.
PLR 2004452010 says that general language similar to that used in Decedent’s will is not sufficient to waive the right of recovery. According to the PLR, “the right of recovery with respect to QTIP is waived only to the extent that language in the decedent’s will or revocable trust specifically so indicates (e.g., by specific reference to QTIP, the QTIP Trust, section 2044, or section 2207A).”
Thus, the QTIP trust or Husband’s children are responsible for the estate tax even though Decedent’s will appear to waive the right of recovery under § 2207A. Practitioners should be aware of the impact on beneficiaries of the right of recovery under IRC § 2207A. If a surviving spouse does intend to waive the right of recovery, practitioners should use specific language referencing QTIP trust or IRC § 2207A.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Cody J. Edwards
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