Tax Apportionment Problems Under the Georgia Probate Code

• Publication year: 2003
• Pages: 0001

Georgia Bar Journal Volume 8.

GSB Vol. 8, No. 6, Pg. 1. Tax Apportionment Problems under the Georgia Probate Code

Georgia State Bar Journal
Vol. 8, No. 6, June 2003

"Tax Apportionment Problems under the Georgia Probate Code"

By James R. Robinson

In the Anglo-Saxon common law tradition, the archetypal means of transferring property at death is by will. However, in modern society, significant wealth often is transferred by non-testamentary means. The disposition of many forms of wealth is controlled not by the terms of a will, but by contractual arrangement or by operation of law. For example life insurance or employee benefits typically pass directly to one or more beneficiaries designated by the insured or the employee. Property held in joint tenancy with right of survivorship passes to the surviving joint tenant(s) by operation of law; an attempted disposition by will of an undivided interest in such property is ineffective. These assets sometimes are referred to as "non-probate" assets and do not comprise a decedent's "estate," that is the property owned by the decedent and subject to the probate code, which establishes the rules for disposing of property by will

Federal estate tax typically makes no such distinctions. The gross estate for federal estate tax purposes includes all property in which the decedent had an interest, in whatever form, to the extent of his or her interest therein.2 Various Internal Revenue Code Sections ensure the includibility of virtually all non-probate assets, including life insurance,2 joint tenancy with right of survivorship3 and employee benefits.4 These assets generate tax liability in the same manner as those that pass under the decedent's will

The question of who bears the burden of the taxes attributable to these assets can be a significant one especially when the beneficiaries of one asset or disposition and another are not the same. Unfortunately, current Georgia law does not provide an answer that is even remotely adequate. Georgia is one of a minority of states that still follow the common-law "burden on the residue" rule. Unless the decedent's will directs otherwise, all taxes and other expenses of administration are paid out of the residuary estate - that is, that part of the probate estate remaining after all specific testamentary dispositions have been deducted. A will that is silent on the payment of taxes is subject to this rule, the operation of which can produce significant (and perhaps unexpected) inequities. An attorney must consider how to address the issue of the tax burden, especially when drafting a will for a client with significant non-probate assets. However, for the Georgia practitioner there is a further and potentially more serious difficulty. It is unclear whether under Georgia law a direction in a will to charge taxes or other expenses against non-probate assets is effective or enforceable, at least in the absence of a specific federal statute granting a right of recovery to the personal representative of the probate estate.

The Uniform Estate Tax Apportionment Act (the "Act")5, adopted by roughly half of the states, addresses these concerns. In contrast to the common-law rule, the "default" rule under the Act is one of full apportionment of taxes: that is, taxes are paid pro rata from all assets that generate tax liability, whether part of the probate estate or not. The question posed by this Article is, which should be the default rule: the common-law burden on the residue rule, still followed in Georgia and in a handful of other states, or the rule of apportionment as contained in the Act? Given the sometimes dramatic (and potentially unintentional) inequities that can arise by virtue of the common-law rule, I argue that apportionment is the preferable rule, and should be adopted in Georgia. The Act provides a readymade solution at hand, one that can easily be incorporated into Georgia's Probate Code.6

OVERVIEW OF APPORTIONMENT

As its name suggests, the term "apportionment" refers to the allocation of the liabilities and expenses of an estate, most significantly federal estate taxes, against the various assets of the estate. It is to be contrasted with the common-law "burden on the residue" rule, which in the absence of a specific direction in the will to the contrary, charges all taxes and expenses of administration against the residue of the probate estate, that is, what is left over after all specific testamentary dispositions are made.

A simple example will suffice to illustrate the basic concept. Suppose that T dies owning a residence worth $500,000, savings bonds also worth $500,000, and securities in a brokerage account worth $1,000,000. T's will devises the residence to T's child A, bequeaths the savings bonds to T's child B, and leaves the residue of the estate to T's children C and D. For simplicity's sake, assume that T's estate of $2,000,000 generates $435,000 in estate taxes, and make the further assumption that there are no other expenses associated with the administration of T's estate. T's will is silent on the payment of taxes. Under the burden on the residue rule, A and B would receive the property devised or bequeathed to them undiminished by taxes, which would be paid from the residue of the estate. Thus, C and D would each receive $282,500 after the payment of taxes, while their siblings each would receive property worth $500,000. By contrast, if apportionment is directed either by statute or by the will each child's share would bear a pro rata portion of the total tax liability. All other things being equal, each child would receive a net amount of $391,250.7 Whether one result or another comports with T's intention is a question only T can answer, but this example serves to illustrate the dramatic difference between the common-law rule and an apportionment scheme. The question is, what should be the "default" rule? Assuming that T wanted to treat all four children equally, the answer is that apportionment is the only way to achieve this, at least in the absence...