Some years ago, I represented family members in a dispute over a tax payment clause contained in a will. The will was prepared by a lawyer who did not take into consideration the disastrous ramifications that can occur if care is not taken with respect to payment of estate and inheritance taxes in an estate plan.
The decedent was in a same sex relationship with his longtime life partner. In his will, the decedent provided for a specific bequest of his interest in a multi-million dollar family business to his nieces and nephews. The will went on to bequeath the remainder or residue of the decedent’s assets to his life partner. Unfortunately for all of the parties, the drafter of the will did not alter the rather common will clause that provided that all estate and inheritance taxes were to be paid from the residue of the decedent’s estate.
Because husbands and wives generally can leave each other assets free of tax, providing that taxes should be paid from the residue does not pose a problem, under estate and inheritance tax laws. However, the law in effect at the time did not extend this provision to unmarried same sex couples.
The specific bequest to the nieces and nephews generated not only Federal Estate Tax, but also Kentucky Inheritance Tax since it was a bequest to Class B beneficiaries under Kentucky law. Due to the amount of estate and inheritance tax owing on the multi-million dollar bequest to the nieces and nephews, the residue of the estate, even if liquidated and converted to cash to pay the tax, was not large enough to fully satisfy the amount of tax due and would be completely wiped out. Hence, the life partner would have received nothing from the estate and would be left destitute.
This tragic set of circumstances led to a malpractice action being brought against the drafter of the will. Ultimately, the insurance carrier of the will drafter was forced to step forward and pay an amount equal to the value of the residue of the estate. This outcome resulted in the life partner being made whole, and in a windfall to the nieces and nephews in that they were relieved from paying a large portion of the estate and inheritance taxes personally. (Note that since the taxes exceeded the value of the residue, the nieces and nephews still would have had to the pay the differential due to a concept called abatement.)
This case ended on a good note for my clients, and provides a good example of the care needed when drafting wills, especially for same sex couples. If the will drafter had simply changed the tax clause to provide that the estate and inheritance taxes should be apportioned among the beneficiaries based on what each beneficiary was inheriting under the will, the problem would not have arisen. While the instant matter arose before the legalization of same sex marriages, its lesson is still applicable for those same sex couples who choose not to marry or any person whose estate will generate a significant amount of estate and inheritance tax.
This article originally appeared in the Fall 2016 issue of BGD Magazine.