An Introduction to Apportionment

Apportionment relates to how (or from which property) estate taxes are paid.  A person with a taxable estate may die with property in various forms -- in her own name (that's probate property), in trust (non-probate), with beneficiary designations (non-probate), etc.

The question then becomes, how do we figure out which assets are used to pay the tax? The answer to this question may have a great impact on what the beneficiaries receive.  If all taxes are paid only from probate property, then beneficiaries under my Will wind up paying my estate tax (and having their bequests reduced).  That's why the general rule in Illinois is for courts to apply the concept of "equitable apportionment," which permits taxes to be apportioned among probate AND non-probate assets.  That strikes me as fair.

That being said, a testator is free to override the concept of equitable apportionment in his or her estate planning documents.  For instance, a Will might say something like this:

All estate and succession taxes, including interest and penalties payable by reason of my death, shall be paid out of and be charged against the principal of my residuary estate, without reimbursement from any person.

That language clearly indicates that estate taxes are paid from probate assets (and from the residue of the probate estate) only. 

I see two problems raised by the above language:

1. Why would you want to do this?

2. What if the estate taxes exceed the value of the residue?

The recent case of Estate of Williams (from the 3rd District Court of Appeals) tries to address question #2.  In that case, the court found as follows:

... [W]here a testator directs through her will that all obligations be paid from the residue yet the will is silent as to the source of funds in the case that the residue is insufficient to cover such liabilities, equitable apportionment must be applied if it is later discovered that the residue is in fact insufficient.  In such a case, the testator has failed to clearly express her intent as to who should be responsible for the additional payments and the will is ambiguous on this issue.  The application of the doctrine of equitable apportionment is therefore proper.