The Right of Election and Tax Apportionment

The Effect of a Spousal Election on a Tax Exoneration Clause:

“A Rejection with an Exception”

Introduction:

When a decedent passes away, his estate bears either federal or state estate taxes.[1] In the United States, a decedent spouse is entitled to gift everything they own to their surviving spouse free of any taxes.[2] Generally, in New York, EPTL 2-1.8 provides for an equitable apportionment of taxes among beneficiaries of a decedent’s estate. EPTL 2-1.8(c)(2) provides that a spouse is entitled to take advantage of the marital deduction in an apportionment. For a spouse to be eligible for the marital deduction, she must a United States citizen.[3]

Although EPTL 2-1.8 provides for an equitable apportionment among beneficiaries of an estate, a testator can provide otherwise.[4] For example, a testator can direct that all taxes that are created as a result of his estate are to be paid by the testator’s residuary beneficiary.[5]

In New York, a surviving spouse has the right to elect against her deceased spouse’s will or intestate estate.[6] The spousal elective share generally consists of a third of the decedent’s estate.[7] Usually, a spouse exercising her right of election is eligible to take advantage of the unlimited marital deduction[8].

An interesting issue arose in Matter of Priedits,[9] where a spouse was a non-citizen and was unable to take advantage of the unlimited marital deduction.[10] The question was whether, in electing against her deceased husband’s estate, the surviving spouse could take advantage of a clause in the decedent’s will directing that all taxes generated by his estate be paid by his residuary beneficiary, a charity.[11] What makes Priedits so interesting is that the residuary is a charity, the only other class shielded from tax liability under EPTL 2-1.8(c)(2).

Both the wife and the charity have compelling arguments. In Part I of the article, I will discuss the procedure of the spousal right of election in the context of the Priedits case. In Part II, I will discuss tax apportionment, a testator’s tax exoneration clause, the effect on it in a spousal election, which after all is a rejection of the decedent’s will. That will require an analysis of whether the testator contemplated a spousal election in directing her tax exoneration. In part III, I will address the calculation of contribution to the elective share.

For efficiency, I will use the male pronoun for the deceased spouse, and the female pronoun for the surviving spouse.

I.

In Matter of Priedits,[12] the Surrogate applied EPTL 5-1.1-A[13] in determining the spousal right of election. The decedent made numerous pre-residuary bequests, and named a charity as his residuary beneficiary. The will did not leave anything for the decedent’s surviving spouse.[14] However, the decedent designated his spouse as a beneficiary of two IRA accounts.[15]

            A clause in the decedent’s will directed that, all estate taxes created by his estate “…whether the property passes by will or otherwise, be paid out of the residuary estate, without contribution from any recipient.”[16]

The surviving spouse in Priedits complied with the requirements of EPTL 5-1.1-A. A surviving spouse[17] may exercise her right to elect against her husband’s will so long as she does so in a timely manner,[18] has not waived it,[19] and is not disqualified.[20] In Priedits, the decedent’s total estate amounted to approximately $9.4 million, of which $8 million consisted of probate property such as real property, securities and bank accounts.[21] Additionally, the decedent created Individual Retirement Accounts (hereinafter “IRA”) adding up to approximately $1.1 million.[22] The decedent’s will made two pre-residuary gifts to his friends[23] of real property valued at approximately $2 million and gave the remainder, approximately $6 million to his residuary beneficiary, a charity.[24] He named his spouse, Banora, as the beneficiary of the two IRA’s.

The surviving spouse in Priedits had two clear options. She could take her $1.2 million benefit under the IRA accounts tax free through operation of the decedent’s tax exoneration clause.[25] Alternatively, she could elect against her husband’s estate and carve out a third for herself, amounting to approximately $2.9 million dollars.[26]

The electing spouse in Priedits received a one-third share of the net estate.[27] In calculating the net share, the Surrogate would include the value of all property passing under the decedent’s will (probate property), all property that qualifies as a testamentary substitute (here, the IRA’s),[28] and, if any, all property that passes under the laws of intestacy via EPTL 4-1.1(here, none).[29] The decedent’s debts,[30] administration expenses, and reasonable funeral expenses are deducted prior to the calculation of the net estate.

Absolute gifts that the surviving spouse receives as a result of her husband’s death are deducted from her one-third share.[31] Accordingly, in Priedits, the surviving spouse’s share is reduced by what she received via the decedent’s IRA accounts.[32] The IRA’s are included because they qualify as a testamentary substitute in calculating the net estate.[33]

All of the beneficiaries of the decedent’s estate have to contribute[34] ratably to the spouse’s elective share, and in Priedits, this includes the charity.[35]

II.

There are two ways in which a surviving spouse is protected from bearing the burden of estate taxes. First, EPTL 5-1.1-A, the right of election statute, directs that estate taxes are not included in calculating a spousal elective share. The policy behind this direction is that the spouse is receiving a percentage of the decedent’s estate, and it would be reduced if taxes were taken out beforehand. Second, EPTL 2-1.8, the tax apportionment statute, directs that spouses are entitled to take advantage of the Unlimited Marital Deduction.[36] The Unlimited Marital Deduction allows a surviving spouse to receive any property passing from her deceased husband, free of tax.[37] However, eligibility for the Unlimited Marital Deduction hinges on United States Citizenship.[38] In Priedits, the electing spouse is a not a United States Citizen, and is unable to take advantage of the marital deduction.[39] To complicate the matter, the testator deactivated EPTL 2-1.8, in directing that taxes be apportioned against the residuary beneficiary, a charity.[40] The very thing that the spouse is rejecting in electing against her husband’s will, she seeks to take advantage of.

Although the charity in Priedits must contribute to the elective share, it is the only other class of beneficiaries that is entitled to take advantage of deductions under EPTL 2-1.8.

In Priedits, the court’s first encounter with taxes would be under EPTL 5-1.1-A(a)(2). EPTL 5-1.1-A(a)(2) provides that taxes are disregarded in calculating the net estate[41] however, the statute also states that “nothing contained herein relieves the surviving spouse from contributing to all such taxes the amounts apportioned against him or her under [EPTL] 2-1.8.”[42] Meaning that a spouse’s right of election does not affect her obligation to pay estate taxes.

EPTL 2-1.8 is a default statute, meaning that a testator can provide otherwise in his will.[43] In the event that a testator fails provide for the apportionment of taxes, taxes “shall be equitably apportioned among the persons interested in the gross tax estate….”[44] The statute further provides “tax[s] shall be apportioned among the persons benefitted in the proportion that the value of the property or interest received by each such person benefited bears to the total value of the property and interested received by all persons benefitted.…”[45] This means that each beneficiary of a decedent’s estate shall contribute to the total value of estate taxes in proportion to their share[46]. Alternatively, if a decedent provides for tax apportionment in his will, it deactivates EPTL 2-1.8.[47]

However, an issue that has rarely been addressed, is what is the effect of a right of election on tax apportionment clause in a decedent’s will, that provides in a general sense, that the residuary bear the burden of the taxes for everything passing by “will or otherwise.”

When a spouse elects against her husband’s estate, she is essentially, opting out of the will. In Matter of Rozenzweig,[48] the Court characterized the effect of a spousal right of election as “a surrender of all her rights under the will.” The surrender due to an election was further exemplified in Matter of Friedman,[49] where the court held that, as a result of an election, a spouse surrendered a limited power of appointment.

Similarly, the court in Matter of Lunney,[50] reasoned that as a result of an election, a surviving spouse “forfeits any benefits provided for her…” A tax exoneration clause can truly be a benefit, as exemplified in Priedits, Banora is receiving approximately $2.9 million tax free[51]. The result of her election has created an additional $1 million dollar tax burden on the residuary.[52] Clearly, in the eyes of the residuary beneficiary, it is conferring a benefit upon the surviving spouse.

Furthering the proposition that a tax exoneration clause confers a benefit upon a spouse, and therefore should be forfeited upon election, is the Surrogate’s Court’s decision in Matter of Wu.[53] The court in Matter of Wu, held that a tax exoneration clause is considered a “beneficial disposition” under the guise of EPTL 3-3.2(a), and that an attesting witness beneficiary cannot receive such a benefit without an additional attesting witness.[54] The court voided the tax exoneration clause for the purpose of its applicability to the attesting witness beneficiary[55]. Accordingly, after following the precedent set forth in Wu, the only just result is that Bonora’s election amounts to a forfeiture of the tax exoneration clause.[56]

Assuming that a tax exoneration clause is unaffected by an election, the exoneration clause must contemplate the possibility of a spousal election to be effective. The court in Matter of Bank,[57] held that a decedent must direct his “intent to provide additional benefits to the spouse upon the exercise of his or her right of election must be clear and unambiguous.”[58]

However, whether language like “otherwise” contemplates the right of election is a unique, because a right of election is not a non-testamentary instrument, or property passing under the will, it is a very specific alternative. One can assume that to contemplate for an electing spouse, a very specific scenario, a testator would direct it specifically in his tax exoneration clause.

In considering the decedent’s intentions in a tax apportionment clause, one can presume that the decedent was aware of the default tax apportionment statute (Especially, if the decedent provided otherwise in creating a tax apportionment clause). That is exactly why specificity is required to appropriately apportion taxes via a will. Similarly, it can be presumed that a decedent that provided for apportionment in his will was aware of his spouse’s right to elect against his will, and if he intended to give her the benefit of a tax exemption, he would have to specifically stated so.

The meaning of “otherwise” in a tax exoneration clause and whether it contemplates a spousal right of election was examined by a Surrogate’s court in the past. In Matter of Clark,[59] the Surrogate’s court held that a surviving spouse could not take advantage of a decedent’s tax apportionment clause as a result of her election. Although the will involved the apportionment of Virginia tax law, it is helpful. The decedent’s apportionment clause “directed that ‘any and all’ estate taxes imposed upon or measured by ‘property that passes by my will, or otherwise, shall be paid out of the principal of my residuary estate.”[60] The court reasoned that “it is clear, that the widow here cannot claim the benefit of the tax clause of the will because her election against the will is a rejection of the will and all of its provisions.”[61] The decision of the court in Clark is relevant, as the court furthers the proposition that an electing spouse rejects the decedent’s will, and is unable to take advantage of any provisions within it, even when a decedent uses the word “otherwise” in directing his apportionment.

Similarly in Matter of Gingold’s Will,[62] the Surrogate’s court held that a surviving spouse was not entitled to take advantage of a tax apportionment clause as a result of her election[63]. Interestingly, the court found specific intent by the testator, directing that if the spouse elected, the elective share was to be fulfilled by a residuary trust.[64] The outcome in Gingold’s Will, furthers the proposition that specificity is required in contemplating the allocation of decedent’s intentions.

An alternative argument does exist if the testator’s language was ambiguous. Assuming that a spouse could still take advantage of a tax apportionment clause, and the language was ambiguous, a Surrogate’s court constructing the tax exoneration clause, will apply a presumption in favor of family over strangers.[65] Accordingly, if a tax apportionment provision is said to be ambiguous, and the residuary beneficiary is anyone other than family, the provision will be construed in favor of an electing spouse, and apportion taxes against the residuary.

III

In determining the charity’s contribution to the elective share, the court in Matter of Priedits[66] calculated the residuary beneficiary’s (here, a charity) contribution before taxes were deducted. The outcome of this pre-tax calculation leads to an unfortunate result. The charity ended up contributing at an inflated rate and therefore in a ratio more than what it received. The following hypothetical will serve to exemplify this unfortunate result.

A decedent left a net estate of $10 million. He made two pre-residuary gifts, one to “A” in the amount of $2 million, and to “B” in the amount of $2 million. The residuary beneficiary was to receive the remainder, $6 million. The decedent’s will provided that the taxes were to be paid out of the residuary. Estate taxes amounted to $500,000. The decedent’s surviving spouse, who is not a United States Citizen, elects against his estate. Assuming the court holds that the spouse is exonerated from the payment of taxes generated by her share, she is entitled to a third, and will receive $3,333,333 million. Following the court in Priedits’s calculation, A and B must each contribute $666,666, and the residuary, must contribute $1,999,999 to the elective share. Then, after contribution to the elective share, the charity must pay the estate taxes, $500,000. Had the taxes been deducted prior to the calculation of how much the residuary owed, the residuary would have been liable to contribute what they actually received, not what they received inflated by taxes.

Public policy considerations behind this unfortunate outcome are compelling. Both the spouse and charity are the only two classes of beneficiaries protected by ETPL 2-1.8 in apportionment. Although the elective share is carved out in a manner to give a spouse the highest possible benefit, charities are also a protected class. The resulting injustice created by an inflated contribution to the elective share substantially impairs the rights of the residuary.

Conclusion:

Matter of Priedits introduced a unique set of facts to the world of tax apportionment in the context of the spousal right of election. The fact that a surviving spouse is entitled to take advantage of a tax exoneration clause after rejecting her husband’s will stands to support an argument that an electing spouse is entitled to pick and choose clauses of a will that she rejected. An electing spouse can essentially reject the entire will if it provides no benefit to her or take advantage of a beneficial clause (here, a tax exoneration clause). Additionally, the court in Priedits calculated the charity’s contribution to the elective share prior to the deduction of taxes, which resulted in an inflated contribution. Clearly, in Priedits, blood determines superiority.

 

 

[1] As of November 2, 2014, estates that are greater than $5,340,000 are liable for federal estate taxes. IRC 2010(c)(3). In New York, the legislature has amended the exclusion for estate taxes. The exclusions are set by a schedule to increase yearly, until January 1, 2019, when the New York State estate tax exclusion will be equal to the federal basic tax exclusion. N.Y. Tax Law 952(c)(2)(A)

In New York, for dates of death on or after April 1, 2014, the basic exclusion is $2,062,500.00, after April 1, 2015, the basic exclusion is $3,125,000.00, after April 1, 2016, the basic exclusion is $4,187,500.00, April 1, 2017, the basic exclusion is $5,250,000.00. Id.

[2] IRC § 2056.

[3] IRC § 2056(d).

[4] EPTL 2-1.8(c).

[5] It can be advantageous for a testator to provide that his residuary beneficiary bear the burden of his estate taxes. For example, if a testator made pre-residuary gifts consisting of specific devises, such as jewelry, he would not want them to bear the burden of paying taxes attributable to the specific devise.

[6] EPTL 5-1.1-A.

[7] See infra at page 6.

[8] IRC § 2056.

[9] Matter of Preidits, 40 Misc. 3d 482, 961 N.Y.S 2d 731 (Surrogate’s Court, Suffolk County 2013).

[10] IRC § 2056.

[11] Matter of Preidits, 40 Misc. 3d 482, 486 (Surrogate’s Court, Suffolk County 2013).

[12] Matter of Preidits, 40 Misc. 3d 482, 961 N.Y.S 2d 731 (Surrogate’s Court, Suffolk County 2013).

[13] It took the legislature years to evolve the law on the spousal right of election into what it is today.   Historically, a wife was entitled to “dower” and her husband was entitled to “curtsey”. Under today’s law, there is no distinction between a husband’s and a wife’s legal right to elect against their spouse’s estate. EPTL 5-1.1-A.

Dower entitled a surviving wife to a right in a third of all real property owned by her husband, excluding property that he inherited. RPL 190. Dower was important in real estate transfers. A wife’s interest in her husband’s real property survived, even after he transferred it to another, unless she waived her right of dower in the real estate contract. Dower was in effect in New York via RPL 190, and was it was abolished on September 1, 1930. L. 1929 Ch. 229, § 12. The current right of election statute still references this age old right. A spouse may elect under current right of election law in lieu of a right in dower, if one existed. EPTL 5-1.1-A(c)(8). Curtsey was a husbands right to an interest in his wife’s real property, it was abolished by Real Property Law Section 189 on September 1, 1930. L. 1929 Ch. 229, §11.

In 1966, EPTL 5-1.1 was enacted. L.1966 Ch. 952. In short, the statute had some deficiencies that worked to the disadvantage of a surviving spouse. A decedent could take advantage of various loopholes, and essentially disinherit his surviving spouse completely or diminish her right substantially. First, a decedent could place all of his assets beyond a spouse’s statutory right by placing it in pensions, life insurance plans, jointly owned federal securities, or in lifetime trusts. ETPL 5-1.1(b)(2), (b)(2)(A), (b)(2)(C). They were unreachable by an electing spouse because they were not included in the calculation of the elective share. Secondly, a decedent could satisfy a spouse’s right by putting a third of his estate in a trust, giving the surviving spouse an income interest, and the remainder to another. This essentially robbed the surviving spouse of the full right to a third of the decedent’s estate. EPTL 5-1.1(a)(1)(B), (c)(1)(d). Third, if a surviving spouse elected against a small estate (less than $50,000.00), she could receive only a third, which amounted to very little. EPTL 5-1.1(a)(1)(A).

An example can serve to exemplify the deficiency in small estates. If a decedent’s estate consisted of $30,000.00.   A surviving spouse would have only been entitled to a one-third interest, namely, $10,000.00. This downfall was specifically addressed by the legislature in the current right of election statute, EPTL 5-1.1-A(a)(2), giving a surviving spouse a right to a decedent’s entire estate if it is less than $50,000.00. Under today’s statute, in the previous example, the surviving spouse would receive the entire estate, $30,000.00.

[14] Matter of Preidits, 40 Misc. 3d 482,483 (Surrogate’s Court, Suffolk County 2013).

[15] Id. at 486.

[16] Id.

[17]With limited exceptions, a spousal right of election is “personal” to her. EPTL 5-1.1-A(c)(3). A spousal right of election is terminated at death. Her executor or administrator cannot maintain an election proceeding. EPTL 5-1.1-A(c)(3). As enumerated in EPTL 5-1.1-A(c)(3)(A)-(E), the following exceptions apply to the general rule that a spousal right of election may be maintained only by the spouse herself. A guardian of the child’s property, a guardian at litem, and a guardian under article 81 of the Mental Hygiene Law, may all maintain a proceeding for a surviving spouse. EPTL 5-1.1-A (c)(3)(A)-(E). These exceptions are necessary, because in those cases the surviving spouse would be unable to elect on her own.

A surviving spouse’s eligibility to elect hinges on her designation as a spouse. She must be considered a spouse under DRL 10-a, or have had a common law marriage. . Mott v. Duncan Petroleum, 51 N.Y.2d 289 (1980) (Georgia common-law marriage).   It is notable that same-sex marriage is recognized under DRL 10-a.

[18] A surviving spouse must elect against her husband’s estate in a timely manner. Specifically, she must do so within “six months from the date of issuance of letters testamentary or of administration….” EPTL 5-1.1-A(d)(1). She can apply for an extension during the six month period, and the court may extend her time to file by an additional 6 months. EPTL 5-1.1-A(d)(2). The statute provides that a spouse may not elect against her deceased spouse’s estate “in no event later than two years after the date of the decedent’s death.” EPTL 5-1.1-A(d)(1). A limited exception allows the court, in its discretion, to grant an extension if the surviving spouse can make a showing of “good cause” in accordance with EPTL 5-1.1-A(d)(2). Matter of Sylvester, 107, A.D.3d 903, 978 (2d Dep’t 2013), sets forth a good explanation of good cause. The court in Sylvester held that where a surviving spouse’s attorney fails to a right of election is good cause to grant the extension. Id. at 904.

[19] A spouse can waive her right to elect, so long as the waiver is in writing, signed by the surviving spouse, and acknowledged in accordance with New York’s requirements for the transfer of real property. EPTL 5-1.1-A(e)(1), (2). The waiver only has to be signed by the surviving spouse. EPTL 5-1.1-A(e)(3)(C).   Although the statute calls for compliance with New York’s acknowledgement requirements for the transfer of real property, it has been held that only “substantial compliance” is required for a valid waiver of a spousal right to elect. Matter of Abady, 76 A.D.3d 525, 906 N.Y.S.2d 321 (2d Dep’t 2010); Matter of Seviroli, 44 A.D.3d 962, 962, 844 N.Y.S.2d 115, 116 (2d Dep’t 2007).

[20] EPTL 5-1.2 provides for various scenarios in which a spouse is disqualified to take under certain statutory provisions. While the disqualification applies to a spouse’s right to elect under EPTL 5-1.1-A, it also applies to her right to inherit as a distributee under the laws of intestacy, and her right to exempt property under EPTL 5-3.1. EPTL 5-1.2(a).As provided in EPTL 5-1.2, a surviving spouse can be disqualified in the following scenarios:

First, a surviving spouse can be disqualified from the right of election, if a court rendered either a “final decree of judgment of divorce” (DRL 170), an annulment (DRL 7,140), declared it a nullity, or was dissolved based on absence of the surviving spouse. EPTL 5-1.2(a)(1). They all stand to disqualify a spouse whether or not the court rendering the decision is recognized as valid under New York law. EPTL 5-1.2(a)(1), (3).

Second, a spouse is disqualified if the marriage was void under New York law as “incestuous” (DRL 5), “bigamous” (DRL 6), “or a prohibited remarriage” (DRL 8). EPTL 5-1.2(a)(2). Third, she is disqualified if “[a] final decree of judgment of separation, recognized as valid under” New York law was rendered, and it was in effect when the deceased spouse died. EPTL 5-1.2(a)(4). Fourth, if “the spouse abandoned the deceased spouse [,]” and the abandonment continued through the death of the deceased spouse. EPTL 5-1.2(a)(5). For abandonment to disqualify a surviving spouse, it must be done without justification or consent. The following two cases will help to clarify that.

In Matter of Smith, 204 A.D.2d 334, 611 N.Y.S.2d 280 (2d Dep’t 1994), a surviving spouse was attempting to elect against her deceased husband’s estate, and was disqualified both for abandonment and failure to support. The court found that the wife had abandoned the decedent “without justification or her consent” and that he had failed to support the decedent “although he had the means and ability to do so.” Id. at 334. It is particularly interesting, because a spouse need not rely on the other for a failure to support to have been satisfied. Alternatively, in Matter of Morris, 69 A.D.3d 635, 893 N.Y.S.2d 161 (2d Dep’t 2010), the court held that a surviving spouse had not abandoned his wife. In Morris, a married couple separated in the early 70’s. When the decedent died in 2007, the surviving spouse was not disqualified for the right of election under EPTL 5-1.2(a)(5). The court held that the surviving spouse was not disqualified because the decedent’s daughters, the objectants to the election, could not establish that the separation was “without the consent of the decedent [.]” Id.

Fifth, a surviving spouse is disqualified if she failed to support the deceased spouse, and that non-support lasted through the death of the deceased spouse. EPTL 5-1.2(a)(6).Note that “reprehensible or disgraceful behavior” does not disqualify a surviving spouse. Turano, McKinney’s Practice Commentaries EPTL 5-1.2.

[21] Disclaimer: I relied on multiple documents, including the briefs submitted on appeal for Priedits, in calculating the value of the estate. The numbers have varied from document to document. I have used the average of the calculations.

[22] Matter of Preidits, 40 Misc. 3d 482, 487 (Surrogate’s Court, Suffolk County 2013).

Disclaimer: I am unsure of the type of IRA accounts the decedent created. I am assuming they are qualified plans. See footnote 26 for a discussion of qualified plans.

[23] Matter of Preidits, 40 Misc. 3d 482, 484.

[24] Id.

[25] Id. at 487.

[26] EPTL 5-1.1-A(a)(2).

[27] The elective share consists of either $50,000.00, or one third of the net estate, whichever is greater. EPTL 5-1.1-A(a)(2). Recall, in Preidits, the electing spouse received a third of the decedent’s estate because it amounted to millions of dollars.

[28] Testamentary substitutes are included in calculating the net elective share. EPTL 5-1.1-A(b). In Preidits, the Individual Retirement Accounts were the only two testamentary substitutes. Pension and retirement plans designated after September 1, 1992, are testamentary substitutes if it “is a qualified plan under Internal Revenue Code Section 401(a)(11) or defined benefit plan to which Internal Revenue Code Section 401(a) does not apply under Section 401(a)(11)(b)(iii), only 50% is counted as a testamentary substitute.” Turano, Estate administration at 393 (2014) ; EPTL 5-1.1-A(b)(1)(G).

While the case did not involve any other testamentary substitutes, a surrogate would consider the following in determining what other interests qualify as testamentary substitutes.

  1. Gifts that are made in anticipation of death or “gifts causa mortis” are testamentary substitutes EPTL 5-1.1-A(b)(1)(A). This makes sense, because the decedent essentially disposes of property on the eve of his death. EPTL 5-1.1-A(b)(1)(A).
  2. Gifts that a decedent makes within one year of his death are considered testamentary substitutes. EPTL 5-1.1-A(b)(1)(B). The legislature acknowledged an annual tax exemption enumerated under IRC 2503, which allows for an annual gift of $14,000.00 per person. EPTL 5-1.1-A(b)(1)(B), IRC 2503(b)(1).   Accordingly, when adding such a gift to the net elective share, $14,000.00 per gift must be deducted. For example, if the decedent made a gift to his professor on October 25, 2014, for the amount of $20,000.00, and the decedent died on October 24, 2015. This gift would be considered a testamentary substitute and would be included in the net elective share. However, the annual exemption must be deducted from it, leaving $6,000.00 for the net elective share.
  3. Totten trusts are considered testamentary substitutes. EPTL 5-1.1-A(b)(1)(C). A Totten trust is “a savings account in the name of the decedent in trust for another person.” EPTL 5-1.1-A(b)(1)(C). Upon the death of the settlor, a Totten trust automatically, by operation of law, is designated to an enumerated beneficiary. Refer to EPTL 7-5.1 for the law governing Totten trusts.
  4. Money that was deposited into a joint bank account with a right of survivorship after August 31, 1966, is a testamentary substitute. EPTL 5-1.1-A(b)(1)(D). If the spouse is not a joint owner, she bears the burden of proving how much the decedent contributed to it, to be able to collect his contribution. The legislature has specifically rendered the dead man’s statute inapplicable in establishing contribution. EPTL 5-1.1-A(b)(2). Alternatively, it is presumed that the decedent contributed half of the money on deposit if the surviving spouse was the other joint owner. Id.
  5. Jointly owned property held by the decedent in joint tenancy with a right of survivorship is considered a testamentary substitute, because it automatically transfers to the surviving joint tenant by operation of law upon the decedent’s death. EPTL 5-1.1-A(b)(1)(E). Note that savings bonds are included under this class. EPTL 5-1.1-A(b)(3). The surviving spouse carries the same burden she did under joint bank accounts with regards to how much the decedent contributed, and how much she is entitled to. EPTL 5-1.1-A(b)(2).
  6. Lifetime trusts are considered testamentary substitutes if the decedent created it after August 31, 1992, and he retained it for his life, “or for a period not ascertainable without reference to his death; or for a period that does not, in fact, end before his death, the right to posses or enjoy the property; the right to its income; the right to revoke it; or the right to consume, invade or dispose of its principal.” Turano, Estate Administration at 394 (2014) citing EPTL 5-1.1-A(b)(1)(F). A limited exception applies if the decedent could only exercise these powers with the consent of a person with a “substantial adverse interest….”EPTL 5-1.1-A(b)(1)(F).
  7. Finally, any property that the decedent has a presently exercisable general power of appoint over, or if he released the power within a year of his death, is included in the net elective share. EPTL 5-1.1-A(b)(1)(H). Unless the release is exempt from taxation under IRC 2041. A presently exercisable general power of appoint means that the decedent could have exercised it any anytime, and for the benefit of himself.

Although the enumerated list of testamentary substitutes is expansive, life insurance is excluded, allowing a testator to divest his surviving spouse of assets passing via a life insurance policy. Additionally, it is notable that holder of a testamentary substitute is entitled to pay it out to the listed beneficiary, and is not held liable for paying it out prior to an election by the surviving spouse. The surviving spouse can initiate an accounting proceeding to recover any distributed money. EPTL 5-1.1-A(c)(4).

[29] EPTL 5-1.1-A(a)(2). New York’s statute on intestacy is highly favorable to a surviving spouse of an intestate decedent. Statutory intestacy gives a surviving spouse, as a distribute, either the decedent’s whole estate or, if the decedent had issue survive him, the spouse gets $50,000.00 plus half of the estate. EPTL 4-1.1(a)(1), (2). The decedent’s issue would receive the other half by representation. EPTL 4-1.1(a)(1). However, decedents often die partially intestate where they may leave some property to intestacy, but most of it is disposed of either in the will or via testamentary substitutes. In the event that a surviving spouse does elect against a partially intestate decedent, distributees must also contribute to it. EPTL 5-1.1(a)(2).

[30] Creditors take priority over all beneficiaries, including the electing spouse. EPTL 5-1.1-A(a)(2), (b) (5).   In the event that a creditor has a claim against a decedent’s estate, EPTL 12-1.2 provides for an order of priority, in which creditors can “attack” to receive their due payment. EPTL 12-1.2 is a default statute, meaning the testator can direct otherwise. The following order is the statutory default: distributees, residuary beneficiaries, general beneficiaries, specific beneficiaries, and finally, a spousal share, so long as it qualifies for the unlimited marital deduction. The statutory order is logical, it attempts to leave a testator’s truly intended beneficiaries and dependents last in the picking order. Take note, that a demonstrative bequest may be categorized as a residuary bequest or a specific bequest, which is dependent on whether its source has been depleted. EPTL 5-1.1-A(a)(3), (4). Interestingly enough, if there had been any creditors in the Preidits case, it would make for another unusual case, because a spouse’s share is only protected if it is eligible for the marital deduction. EPTL 12-1.2(a)(5). Finally, refer to SCPA 1811, which provides for a statutory priority if there are multiple creditors against an estate.

Further exemplifying the legislature’s policy of favoring creditors, a surviving spouse may make an application to the court to cancel the election so long as “no adverse rights have intervened and no prejudice is shown to creditors or other persons interested in the estate.” EPTL 5-1.1-A(c)(5). The court in Matter of Oestrich, 61 A.D.3d 1317, 877 N.Y.S.2d 754 (3d Dep’t 2009), exemplified this statutory requirement, in addressing the right of a spouse to cancel her election. The Surrogate’s Court determined that it was within its discretion to permit a cancellation, so long as no prejudice was shown to the creditors. Id. at 1319.

[31] EPTL 5-1.1-A(b)(1). Alternatively, any interest in property that would have passed to the spouse other than absolutely, has the legal effect as if the surviving spouse predeceased the decedent. EPTL 5-1.1-A(a)(4)(B). An interest has not passed absolutely “if the interest so passing consists of less than the decedent’s entire interest in that property, or consists of any interest in a trust or trust equivalent.”EPTL 5-1.1-A(a)(4)(B). An example of an interest that does not pass absolutely is if a surviving spouse received a life estate interest in a trust, and the remainder to another. For example, if a decedent left in trust $100,000.00 for his wife for life, and the remainder to his neighbor. In the event of an election, the trust will operate as if the surviving spouse predeceased the decedent, accelerating the remainder interest to the neighbor.

[32] See footnote 20.

[33] EPTL 5-1.1-A(b)(1)(G).

[34] EPTL 5-1.1-A(a)(2),(3). The Surrogate has authority to marshal the assets of a decedent, no matter where they are located, accordingly, property located outside of New York State, real or personal, is included in the net estate. EPTL 5-1.1-A(c)(7). Real property located out of New York State will also be used to offset the surviving spouse’s elective share, if she receives it by operation of law or under the will. To get a ratable contribution from these beneficiaries, the surrogate must get personal jurisdiction over the beneficiaries “based either on their presence in New York or their acts or omissions that constitute a basis for the long-arm jurisdiction of SCPA 210 or CPLR 302. Turano, McKinney’s Practice Commentaries EPTL 5-1.1-A. However, if a Surrogate is unable to get jurisdiction over a foreign beneficiary, the property is unreachable.

[35] EPTL 5-1.1-A(c)(2).   Two examples can help to exemplify contribution:

Example one: Decedent H, died testate. His estate consisted of three bequests, A received $100,000.00, B received 200,000.00, and C was his residuary beneficiary. The residuary consisted of $300,000.00. W, H’s surviving spouse was the beneficiary of a Totten trust that consisted of $5,000.00. Assuming there are no debts, administration expenses, and reasonable funeral expenses, the net elective share is $615,000.00. It consists of all three bequests, and W’s Totten trust. W received a testamentary substitute for the amount of $5,000.00, and is reduced from the net elective share, in accordance with EPTL 5-1.1-A(a)(4). Under EPTL 5-1.1-A(a)(2) W is entitled to a third, which equals out to $600,000.00. The beneficiaries under H’s will must all contribute ratably. Accordingly, A must contribute $33,333.00, B must contribute $66,000.00, and C must contribute $100,000.00.

Example two: Decedent died testate, leaving a will that directed the following. To my daughter, I leave 4 Million dollars, and to my son, I leave 4 million dollars. I designate my residuary beneficiary to be by neighbor. There was 2 Million dollars left over in the residuary estate. Decedent also had a Totten trust in the amount of $1 million, in trust for his brother. Decedent’s surviving spouse elects against his estate. A creditor of the decedent, “bank” is owed $1 million. First recall the following: EPTL 5-1.1-A(a)(2), (b)(5). Both state that the right of election in no way affects a creditor’s priority against the estate. Secondly, recall that the Totten trust is included in the net elective share. EPTL 5-1.1-A(b)(1)(A). First, “bank” the creditor, takes first priority, and as per EPTL 12-1.2(a), distributes would be liable first, however, there are none in this hypothetical, therefore, the decedent’s neighbor will be solely liable for the debt owed to the bank. This reduced the entire “net estate” to 10 million dollars. The surviving spouse will take a third, which amounts to approximately a share of $333,333.00. The Daughter will owe $333,333, the Son will also owe $333,333. The residuary beneficiary will owe $33,333(because his share was knocked down to 1 million dollars due to the creditor), and the decedent’s brother will owe $33,333, because his Totten trust was included in the net estate.

[36] EPTL 2-1.8(c)(2), IRC 2056.

[37] IRC § 2056.

[38] IRC § 2056(d). For example, a decedent, Stephen, died testate, his will provided: $200,000 to A, my son, $400,000 to W, my wife (a U.S. citizen), and my residuary estate to B. The residuary estate consisted of $400,000.00. The decedent did not provide for apportionment of taxes. The taxes owed are 100,000. A owes $33,333, and B owes $66,666. The decedent’s wife owes nothing due to the unlimited marital deduction. In the alternative, if the decedent’s wife was not a U.S. citizen: A would owe $20,000, the decedent’s wife owes $40,000, and B owes $40,000.

[39] Matter of Preidits, 40 Misc. 3d 482, 485 (Surrogate’s Court, Suffolk County 2013)

[40] Id.

[41] See above at page 6.

[42] EPTL 5-1.1-A(a)(2).

[43] In order for a tax apportionment clause to appropriately direct the payment of taxes, it must comply with the requirements as directed under EPTL 2-1.8(c), (d). EPTL 2-1.8(c) provides a testator the authority to provide otherwise over the default statute. EPTL 2-1.8(d) provides that tax apportionment in a will only applies to property passing under it, unless the testator specifically provides otherwise. EPTL 2-1.8(d). The court of appeals addressed the requirement of unambiguity in Matter of Pepper, 307 N.Y. 242, 251, 120 N.E.2d 807, 811 (1954), holding that “a tax apportionment clause in direction against statutory apportionment must be clear to be effective.”Id.

The requirement of clear direction in an apportionment clause was exemplified in Matter of McKinney, 101 A.D.2d 477, 477 N.Y.S.2d 367 (2d Dep’t 1984), where the court found that when the testator merely referred to his “aforesaid” bequests in directing apportionment was open to two interpretations, and was ambiguous. The court applied the default statute, EPTL 2-1.8. see also Matter of Scuchman’s Will, 51 Misc. 2d 541, 273 N.Y.S.2d 548 (Surrogate’s Court, Nassau County 1966) (holding that clear and unambiguous direction was required by a testator for a tax exoneration clause to take affect).

[44] EPTL 2-1.8(a).

[45] EPTL 2-1.8(c)(1).

[46] A simple formula for this calculation is X (beneficiary’s share) divided by Y (total estate) multiplied by Z (total estate taxes owed), the value will represent how much the beneficiary must contribute. For example, the decedent, Kevin, died testate, his will provides: $200,000 to A, and his residuary estate, $200,000.00 to C. Additionally, Kevin named B the beneficiary of a Totten trust, which amounted to $400,000.00. The taxes owed are $100,000.00. The gross estate is $800,000.00, because all beneficiaries, including non-testamentary beneficiaries are burdened with paying estate taxes. Following the formula explained above, A will owe $25,000, B will owe $50,000, and C will owe 25,000.

[47] It can be beneficial for a decedent to provide for apportionment, because he can provide specific amounts to different beneficiaries, knowing that they will or will not be burdened with paying estate taxes. Additionally, a testator may direct apportionment of taxes regarding property that passes through his estate, in devices other than the will, including trusts and retirement accounts, subject to the limitations set forth in EPTL 2-1.8(d) (directing that a testamentary substitute cannot exempt itself from taxes, unless provided for in the will). In Preidits, the testator did just that. It is also notable that tax apportionment is inclusive of taxes generated by non-testamentary assets.

For example, a testator may direct by will that estate taxes passing by his will or otherwise shall be borne by the residuary beneficiary alone, and that no apportionment under 2-1.8 be directed. Note the “or otherwise” language used, as it contemplates anything that may pass intestate or through non-testamentary means. (see Matter of Clark at page 15).

[48] Matter of Rozenzweig, 19 N.Y.2d 92, 97, 224 N.E.2d 705 (1966).

[49] Matter of Friedman, 67 Misc. 2d 304, 323 N.Y.S.2d 499 (Surrogate’s Court, Westchester County 1971).

[50] Matter of Lunney, 21 Misc. 2d 455, 457, 193 N.Y.S.2d 83, 87 (Surrogate’s Court, Orange County 1959).

[51] Matter of Preidits, 40 Misc.3d 482,488 (Surrogate’s Court, Suffolk County 2013).

[52] Id.

[53] Matter of Wu, 24 Misc. 3d 668, 760, 877 N.Y.S.2d 886,888 (Surrogate’s Court, New York County 2009).

[54] Id. at 761.

[55] Id.

[56] See also Chase Natl. Bank v. Fraizer, 243 A.D. 623, 623, 276 N.Y.S. 524, 524 (2d Dept. 1935)(reasoning that an election amounts to a rejection of every provision of a decedent’s will that was beneficial to her).

[57] Matter of Bank, 184 Misc. 2d 322, 324-325, 707 N.Y.S.2d 800, 802 (Surrogate’s Court, Kings County 2000).

[58] Matter of Bank, 184 Misc. 2d 322, 324-25, 707 N.Y.S.2d 800, 802 (Surrogate’s Court, Kings County 2000) citing Matter of Pepper, 307 N.Y. 242, 120 N.E.2d 807; Matter of McKinney, 101 A.D.2d 477, 477 N.Y.S.2d 367, app. denied 63 N.Y.2d 607, 482 N.Y.S.2d 1024, 472 N.E.2d 48.

[59] Matter of Clark, 107 Misc. 2d 17, 433 N.Y.S.2d 328 (Surrogate’s Court, New York County 1980).

[60] Id. at 19.

[61] Matter of Clark 107 Misc. 2d 17, 19 citing First Camden Nat. Bank & Trust Co. v. Hiram Lodge No. 81, Free & accepted Masons, 134 NJ Eq 303, aff’d 135 NJ Eq 505.

[62] Matter of Gingold’s Will, 116 N.Y.S.2d 868 (Surrogate’s Court, Queens County 1952).

[63] Id. at 870.

[64] Id.

[65] Matter of Larkin, 9 N.Y.2d 88, 172 N.E.2d 555 (1961)

[66] Matter of Preidits, 40 Misc. 3d 482, 961 N.Y.S.2d 731 (Surrogate’s Court, Suffolk County 2013).