The amount a beneficiary will receive to a large extent depends on who, at your death, will be responsible for paying the death taxes and to what extent. Most last wills and revocable trusts have a standard tax apportionment clause directing all taxes to be paid out of the “residue” or remainder of a person’s estate. The residue of a person’s estate is the property that remains in a decedent’s estate after all specific gifts are made.
The residue does not include non-probate assets that pass by beneficiary designation or right of survivorship such as life insurance death benefits, retirement funds (i.e. IRA, 401k, etc.) or any other asset or investment that that passes by right of survivorship (marital home, joint bank accounts, etc.). Under this type of apportionment clause, anytime you give assets away under your will or leave non-probate assets to designated beneficiaries, the residue of your estate is responsible for paying the taxes. And if the recipients of those gifts and non-probate assets are not the same persons as the recipients of the residue of your estate, the recipients of your residue will bear the burden of paying the taxes.
For example, in your last will you make specific gifts to the children of a second spouse, to a niece or nephew, to a close friend or charity and leave the remainder of your estate to your natural children in equal shares. In this example, the residue of your estate which you intend to leave to your natural children will be responsible for paying the taxes on the specific gifts mentioned above. This can lead to inequitable results reducing the amount available for your natural children. Depending on the circumstances, it may be more beneficial to apportion death taxes to each recipient in proportion to the share they receive. How does your will or trust apportion death taxes? Not sure? Find out by scheduling a free consultation with the Perna Law Firm today.