In the Matter of the Petition of Lisa Townson, Beneficiary of the Estate of Ann K. Townson, Under SCPA 1420 for the Constr. of the Last Will and Testament of Ann K. Townson, 2025 NY Slip Op 25072
(Monroe Surrogate’s Court, March 25, 2025)
Here’s a story of a lovely lady – Ann –
Who was bringing up four very lovely children.
It’s a story of a man named Schuyler
Who was busy with two children of his own - Lisa and Winslow.
‘Til the one day when the lady met this fellow
And . . . . yada, yada.
Townson – today’s decision de jour – involves a blended family with six children and concerns the allocation of federal and state estate taxes between a decedent’s residuary estate and the beneficiaries of qualified terminable interest property trusts (“QTIP trusts”).
Before reaching the meat of the decision, a brief primer on QTIP trusts.
The Internal Revenue Code does not impose estate tax on transfers between a decedent and surviving spouse. However, a decedent who bequeaths property to a surviving spouse outright loses control over how the property will be disposed upon the surviving spouse’s death.
Enter the QTIP trust. The grantor of a QTIP trust can support the surviving spouse, defer payment of taxes until the death of the surviving spouse, and designate the ultimate beneficiaries of QTIP trust property, thus controlling the final disposition of the assets of the trust rather than leave it in the hands of the surviving spouse.
Since a QTIP trust only defers taxes, assets of a QTIP trust are included in the taxable estate of the surviving spouse. The default rule is that payment of taxes attributable to inclusion of QTIP trust assets in a surviving spouse’s taxable estate are paid by the beneficiaries of the QTIP trust.
However, both state and federal law permit a surviving spouse testator to deviate from the default rule – and waive the right to have any taxes due paid by the ultimate beneficiaries of the QTIP trust – if the surviving spouse “specifically directs” by will.
Now, we reach the protein. Schulyer died in 1994. He created two QTIP trusts. QTIP Trust No. 1 benefited Ann during her life and would be split equally between Lisa and Winslow upon Ann’s death. QTIP Trust No. 2 benefited Ann during life and would be split in thirds between Lisa, Winslow, and Ann’s four children upon her death.
In 2022, Ann executed an updated Will bequeathing her entire residuary estate to her four biological children and directing that all taxes be paid from her residuary estate. Specifically, Ann’s Will states:
I direct that my Executor pay out of my residuary estate, without apportionment, all estate inheritance and like taxes imposed by the government of the United States, or any state or territory thereof, or by any foreign government or political subdivision thereof, in respect to all property required to be included in my gross estate for estate or like tax purposes by any such governments, whether the property passes under this Will or otherwise, without contribution by any recipient of any such property.
Ann died in 2023 and her son James became executor of her estate. In December 2023, the estate’s counsel sent a memorandum to the QTIP trusts’ corporate trustee directing it to pay more than $4 million in federal and state taxes.
Not so fast, responded Schulyer’s children – Lisa and Winslow – the primary beneficiaries of the QTIP trusts. They commenced a will construction proceeding seeking to have Ann’s biological children, the beneficiaries of Ann’s residuary estate, pay the entire tax burden incurred by the estate and QTIP trusts pursuant to the language in Ann’s Will directing her executor to pay all estate taxes out of Ann’s residuary estate. Thus, the stage was set for high stakes battle over whether Ann’s children would pay more than $4 million in taxes attributable to property held in a QTIP trust for the benefit of Schuyler’s children.
The question before the Court was whether the language of Ann’s Will – directing her executor to pay all taxes out of her residuary estate, without apportionment, regardless of whether the property passed under her Will or otherwise, and without contribution by any recipient of any such property – satisfied the “specific direction” requirement for a decedent to waive apportionment.
The Court found that Ann’s Will was not sufficiently specific to invoke the exception to the default rule because her Will failed to specifically reference the QTIP trusts or the applicable provision of the Internal Revenue code, and therefore, the taxes attributable to the QTIP trusts’ inclusion in Ann’s taxable estate must be paid by the beneficiaries of the QTIP trusts.
The Court wrote:
[f]ederal law created the tax-planning entities known as QTIP trusts, and federal law has dictated the circumstances under which tax apportionment can be exercised or waived, a scheme New York adopted. When federal and New York statues require words of specific indication of intent and (in case of the Code) a reference to the subchapter, “magic words” referencing the QTIP trusts and/or the Code provisions are exactly what is required.
The takeaway: Taxes attributable to QTIP trust property included in a decedent’s taxable estate are apportioned to QTIP trust beneficiaries unless the decedent expresses a specific intent to the contrary. Where a surviving spouse intends to deviate from the default rule – and to shift the tax burden from the remainder beneficiaries of a QTIP trust to the beneficiaries of the surviving spouse’s residuary estate – the surviving spouse must include a “specific direction” in her Will using the “magic words” expressly referencing the QTIP trust and applicable provision of the Internal Revenue Code.
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