Spouse vs. Charity: Estate Tax Apportionment

Spouse vs. Charity: Estate Tax Apportionment

 By John G. Farinacci, Esq.

Ruskin Moscou Faltischek, P.C.

We know that estate taxes are to be paid in the manner of a testator's choosing, but if the testator fails to make that choice, then estate taxes are "equitably apportioned among the persons interested in the gross tax estate." EPTL 2-2.8.

Normally, where there are charitable beneficiaries and a surviving spouse that is a US citizen, estate taxes are not apportioned to either of the two because the estate can avail itself of the charitable and marital deductions. 

What happens, however, where (i) the testator's will provides that all estate taxes are to be paid from the residuary estate; (ii) the residuary beneficiary is a charity; (iii) the surviving spouse is excluded from taking any share of decedent's estate under his will; (iv) the surviving spouse asserts her right to elect against the decedent's will pursuant to EPTL 5-1.1-A; and (v) the electing spouse is a non-citizen, and therefore, no marital deduction is available on her elective share? In what appears to be a case of first impression, the Suffolk County Surrogate's Court recently held that the charity pays.

In Matter of Priedits, N.Y.L.J., Mar. 22, 2013, at 35, col. 2 (Sur. Ct. Suffolk County), the decedent had a will that provided several pre-residuary legacies to friends and the residuary estate to a charity. The will did not provide for decedent's spouse who was a non-citizen. The spouse asserted her right of election.

The estate tax issue arose in an accounting proceeding. The charity and the Attorney General objected to the executor's accounting which proposed charging all estate taxes to the residuary estate. They asserted that once the spouse elected against the estate, she forfeited all benefits afforded her under decedent's will, including the provision requiring that estate taxes be paid from the residuary estate.

The court looked to the provisions of 5-1.1-A and found nothing that would support the objectants' position. To the contrary, the court cited 5-1.1-A(a)(4)(A) which states in pertinent part that the "...terms of such will or other instrument (elected against) remain otherwise effective so far as possible...", as statutory support for continuing effectiveness of the testator's direction that all taxes be paid from the residuary.

Additionally, the court noted 5-1.1-A(a)(2), which provides in relevant part that "nothing contained herein relieves the surviving spouse from contributing to all such taxes the amounts apportioned against him or her under 2-1.8." The court stated that, conversely, "nothing contained in the statute would obligate a spouse to pay taxes not otherwise apportioned against her, especially, where as here, her spouse has specifically and intentionally opted out of the default tax apportionment statute." Matter of Priedits, at 35, col. 4.

In sum, the court held that the relevant statutes, EPTL 2-1.8 and 5-1.1-A, clearly provide, "unambiguously, that a testator can direct how taxes are allocated among his beneficiaries, including where, as here, an elective share may be exercised." Id.

In this case, the testator chose to direct all taxes to be paid from the residuary estate (i.e., the charity's share) even though electing against the estate was a possibility, the decedent had also provided an IRA for his spouse and had provided pre-residuary legacies to friends. The court thus held that all estate taxes must be paid from the residuary estate.        

Mr. Farinacci co-chairs and is a partner in Ruskin Moscou Faltischek's Trusts and Estates Department. He heavily concentrates his practice in trust and estate litigation, having successfully handled numerous contested cases in the New York State Surrogate's Court, Supreme Court, Supreme Court Appellate Division, Court of Appeals and Federal District Court. Mr. Farinacci also represents clients in estate planning, estate administration and guardianship matters.

Prior to joining RMF, Mr. Farinacci was a partner at a Long Island law firm, where he specialized in trust and estate matters. While in law school, Mr. Farinacci interned for the Nassau Surrogate's Court under Judge C. Raymond Radigan.

For more information about LexisNexis products and solutions, connect with us through our corporate site