Manhattan Surrogate Glen, in a case of first impression, held that the named beneficiary of a life insurance policy passing outside the probate estate, who was also one of two witnesses to the will, was liable for his proportionate share of estate tax, despite a tax apportionment clause directing that estate taxes were to be paid entirely out of the residuary probate estate. In Re Estate of Wu, 2009 NY Slip Op 29181, 4/27/09).

The Executor sought to require the decedent’s brother, who was the named beneficiary of $3.14 million policy, to pay his share of estate tax. EPTL 3-3.2(a)(1) voids a “beneficial disposition” to an attesting witness whose testimony is necessary to prove the will. The Court found that the non-apportionment of estate taxes, which conferred a significant monetary benefit on the brother, was itself a “beneficial disposition.” Accordingly, the Court denied the benefit of the tax clause to the brother, who was required to pay his  proportionate share of estate tax under EPTL 2-1.8, which apportions estate tax among beneficiaries according to the value of what they receive.

Although the brother may have been unaware of his legacy (and presumably would not have witnessed the will had he known), the Court concluded that “animating the invalidation of a legacy to a person whose testimony is required for probate is equally applicable to a benefit conferred by a tax clause.” The Court emphasized that the legacy itself was not voided; the brother was only being required to pay tax on what he received — as would have been the case — had there been no tax apportionment clause.

If a decedent’s will provides that taxes are to be paid out of the residuary estate (as in Wu), beneficiaries of nonprobate assets would ordinarily pay no estate tax. For this reason, the Surrogate Glen warned that drafters of nonapportionment clauses should be aware of the nature and extent of nonprobate assets. A tax apportionment clause may exclude nonprobate assets, and provide that taxes imposed on probate assets be paid out of the residuary probate estate (or that such taxes be apportioned among probate assets). If the tax apportionment clause addresses only probate assets, nonprobate assets would be required to pay a proportionate share of estate tax under EPTL 2-1.8.