Federal and State Estate Tax Apportionment: Planning Pitfalls and Best Practices

Summary

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ACTEC Trust & Estate Talk

Episode Summary:

Federal and State Estate Tax Apportionment: Planning Pitfalls and Best Practices
Date: June 30, 2026
Host: Margaret Van Houten
Guest: Mel Justak, ACTEC Fellow, Chicago

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Episode Overview

This episode focuses on the often overlooked, yet critical topic of federal and state estate tax apportionment. ACTEC Fellow Mel Justak explains how differences between federal and state rules—and a failure to customize common “boilerplate” provisions—can result in costly surprises for beneficiaries and fiduciaries. He offers guidance on the default statutory regimes, their potential pitfalls, waivers, and best practices to ensure estate plans carry out a client’s true intent.

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Key Discussion Points & Insights

1. Why Estate Tax Apportionment Matters

• Unexpected Consequences: Who pays estate taxes, and from which assets, isn’t always clear; improper apportionment can cause beneficiary inequities or disputes.
  • “[Federal and state estate] tax apportionment rules do not always align, and without thoughtful planning, those differences can create inequities among beneficiaries and costly disputes.” – Margaret Van Houten [00:42]

2. Federal Estate Tax Apportionment

• No Federal Apportionment Statute, But Four Recovery Statutes Exist:
  • IRC §2206: Recovery from life insurance recipients (pro rata by value relative to estate).
  • IRC §2207: Recovery from general power of appointment property recipients (also pro rata).
  • IRC §2207A: QTIP (Qualified Terminable Interest Property) property, with marginal calculation.
  • IRC §2207B: Property includable under §2036 (e.g., revocable trusts); pro rata calculation.
• All statutes are default and can be waived, but requirements for a valid waiver differ:
  • “The way they may be waived is actually different among the statutes…be as specific as possible because you know that you won't have any issue if you're very specific as to the recovery right that's being waived...” – Mel Justak [03:37]

3. State Estate Tax Apportionment Rules

• Fewer States Impose Estate Taxes: But state laws on apportionment differ and may influence who ultimately pays.
• Statutory vs. Common Law:
  • Some states (e.g., Illinois) have no statute, relying on common law (equitable apportionment, with a “burden on the residue” rule for purely probate estates).
  • Other states (Florida, California, New York, etc.) have detailed statutes—default can vary.
• State Statutes Also Waivable:
  • “...state apportionment statutes are default rules by nature and can be waived in the governing document, that being the will or the revocable trust.” – Mel Justak [06:37]

4. Best Practices and Planning Pitfalls

• Know Your State Law:
  • Always check the governing law before drafting waivers or relying on default provisions.
  • “...we want to look at, you know, if we're going to be waiving what the state default rule is, we have to know what that rule is before we we can proceed.” – Mel Justak [07:17]
• Coordinate Federal and State Planning:
  • Ensure that deviations from federal default recovery rules align with or aren’t defeated by state law.
• Tailor to Client Family and Asset Structure:
  • Avoid “boilerplate” provisions; consider who benefits and who bears the tax burden.
• Illustrative Example:
  • IRA Example: If an estate’s main asset is an IRA and the IRA beneficiaries are the same as the estate’s, burdening residue for tax works. But if different beneficiaries, one group may unfairly bear the entire tax burden—custom drafting is critical.
  • “If you had the other estate assets pay the estate tax, then you would have one class of beneficiaries bearing the entirety of the estate tax that would benefit the IRA beneficiaries who are completely different, which could be an unfair result.” – Mel Justak [09:32]
• General Rule: Be direct and specific. Assess the intent and circumstances—don’t assume the default matches your client’s needs.

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Notable Quotes & Memorable Moments

• “...it's seldom altered. However, how taxes are apportioned under the standard burden on the residue provision can have unintended consequences on certain beneficiaries...”
  – Mel Justak [01:30]

• “These statutes are default rules. However, you can graft around them for specific situations.”
  – Mel Justak [02:12]

• “I think a best practice is if you are looking to waive the right of recovery under any of these statutes, just be as specific as possible...”
  – Mel Justak [03:37]

• “Know the rules. And then know that we can apply the rules differently depending on what the client's situation.”
  – Mel Justak [10:08]

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Key Timestamps

• 00:42 — Introduction to topic: tax apportionment and its critical role in estate planning.
• 01:27–03:37 — Overview of four core federal recovery statutes for estate tax apportionment and waivers.
• 04:45–06:37 — Discussion of state rules: differences, examples, and the significance of local law.
• 07:17–10:08 — Best practices: identifying and avoiding pitfalls; concrete IRA beneficiary example.
• 09:32 — Example illustrating how poor apportionment can disadvantage one class of beneficiaries.

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Final Notes

Mel Justak emphasizes the need for vigilance and customization in estate tax apportionment planning. Understanding both federal and state default rules—and tailoring them to the client’s full situation—prevents surprise tax burdens and achieves the desired result for all beneficiaries.

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For further resources or to consult an ACTEC lawyer, visit ACTEC.org.

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Transcript

[A]

Federal and state estate tax apportionment planning pitfalls and best practices that is the subject of today's ACTEC Trust and Estate Talk.

[B]

Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.

[A]

This is ACTEC Fellow Margaret Van Houten of West Des Moines, Iowa. When estate taxes come due, the question of who pays and from which assets can create unexpected consequences. And for families and fiduciaries, federal and state estate tax apportionment rules do not always align, and without thoughtful planning, those differences can create inequities among beneficiaries and costly disputes. ACTEC Fellow Mel Justak of Chicago will walk us through how these rules work, where the common pitfalls lie, and how planners can structure documents to better reflect a client's intent. Welcome, Mel.

[C]

Thank you, Margaret. When we think of federal and state estate tax apportionment, often we treat that as a boilerplate provision in our will or revocable trust, and it's seldom altered. However, how taxes are apportioned under the standard burden on the residue provision can have unintended consequences on certain beneficiaries who ultimately bear the tax burden. I think it's important that we know not only the federal and state laws in this area, but also when we're planning for our clients to know their specific situation, because we have broad latitude in how we apportion these taxes in different scenarios. I'd like to start with the Federal Rules. There is no federal apportionment statute per se. However, there are four specific recovery statutes that are available to executors in certain instances, and those begin with Internal revenue code section 2206, which provides for recovery from recipients of life insurance proceeds that pass outside of a probate estate or revocable trust, and that is typically based on a pro rata method of calculation, pro rata based on the value of insurance proceeds relative to the value of the taxable state. And all these recovery statutes may be waived. So these are default rules. However, you can graph around them for specific situations. The second statute is Internal revenue code section 2207, which provides for recovery from recipients of property under a general power of appointment and, like the life insurance provision, also provides for a pro rata method of calculating the recovery based on the value of the general power of Appointment property relative to the taxable estate. Third is section 207 cap A which deals specifically with Q tip property, the qualified terminal interest property that's includable in surviving spouses estate because a Q tip election was made at the first spouse to die estate resulting in a marital deduction that, unlike the prior two statutes, is calculated on a marginal basis. So you calculate the value of the gross estate or the taxable estate and the tax due with the inclusion of the Q tip property. And then you do a secondary calculation with the value of the property less the Q tip property and that increase in the tax by inclusion of the Q tip property is the amount of the recovery. The last category is section 2207 cat. B, which would be property includable under Internal revenue co. Section 2036. More generally, property that would be in a revocable trust, for example, which would be outside of a probate estate but nonetheless includable in the gross estate for federal estate tax purposes. And like sections 2206 and 2207, those are based on a pro rata method of calculation. So we look at the overall value of the non probate assets, the 2036 probate property relative to the taxable state and that's the amount of the recovery that would be owed. Like I said before, these statutes are default rules and they can be waived. The way they may be waived is actually different among the statutes in 2206 and 2207. The statutes there provide that the right of recovery for life insurance proceeds and general power of property may be waived by an express provision in a student's will. However, for Sections 27, Cap A and 2207 Cat B, the 2036 property and the Q tip property, those may be waived in the will or the revocable trust and the waiver must be specifically indicated. That's actually language from the statute itself in those two. So it seems like it's a more precise and a more exact method of waiving. I think a best practice is if you are looking to waive the right of recovery under any of these statutes, just be as specific as possible because you know that you won't have any issue if you're very specific as to the recovery right that's being waived in any of these statutes. We also need to look at what your state law provides. Now, a minority of states still provide for state estate taxes anymore. But however, how we're going to apportion, you know, federal estate tax paid within a certain state may differ from state to state. And you have to see if there's an actual statute that would be in effect for the state where you're administering the estate. So for example, in my home state of Illinois, we have no statute governing tax apportionment. However, it's governed under common law and it's equitable apportionment between probate assets and non probate assets. But within probate assets, it's actually a burden on the residue rule. So if you have only probate assets, it's a burden on the residue. But if you have a combination of probate non probate assets, we look to equitable apportionment between those two classes of assets. Many other states have specific statutes. For example, just to name a few, Florida, California, New York and several other states have statutes that govern the the apportionment of estate taxes, state or and or federal state taxes in their state. Many of the states provide for equitable apportionment by default. But like the federal recovery statutes, these state apportionment statutes are default rules by nature and can be waived in the governing document, that being the will or the revocable cross. So we have to look at the federal rules. We then look at the state rules, and then how do we apply all this? So there are some general considerations I think, to keep in mind when applying this. I think the first one is know what your state rule is because we want to look at, you know, if we're going to be waiving what the state default rule is, we have to know what that rule is before we we can proceed. I think it's also important to understand the relationship between the federal recovery statutes and the applicable state law that's in play. Does the state statute mirror federal law with respect to the types of property I mentioned earlier with the federal recovery statutes, do they have similar requirements as to how one is to veer from those default rules? I think it's also important to keep in mind, as I mentioned at the outside, that we do have broad latitude. And if we are going to veer from the default rules provided by the federal recovery statutes and your state apportionment law, that we understand what we're trying to accomplish. And that could be very different depending on what the makeup of the estate plan is and what the family dynamics are. For example, let's assume that we have an estate. It's taxable for both federal. I'll assume it's in a state without a state estate tax. Keep it simple. It's a federal taxable estate. The major asset in this estate is an ira, there are some other assets and the other assets are barely sufficient enough to cover what the federal estate tax liability would be. If we are to assume for purposes of this example that the beneficiaries of the IRA and the beneficiaries of the estates are the same, the decedent's children in the same proportions, then a so called burden on the residue tax apportionment rule or language in the document. It's probably okay because you are taking the other assets outside of the IRA to pay the estate tax and thereby leaving the remaining estate assets being the IRA to transfer to the children. We don't have to then sell assets or make a distribution out of the ira, which would, if it's a traditional ira, would be not very efficient from an income tax perspective because if it were a traditional ira, we would have income being carried out with that distribution in order to pay a state tax. Now we would have a deduction against the income for the ird, the so called IRD deduction. However, if we can avoid having that situation altogether, it'd be better in this example. But if we change the fact slightly and let's assume that the beneficiaries of the IRA are different than the beneficiaries of the estate, then if you had the other estate assets pay the estate tax, then you would have one class of beneficiaries bearing the entirety of the estate tax that would benefit the IRA beneficiaries who are completely different, which could be an unfair result. So we want to be sure that we're discussing these things with our clients. And so I think it's important that a we know the rules and then know that we can apply the rules differently depending on what the client's situation. I hope this was helpful and thank you for listening.

[A]

Thank you, Mel, for this very helpful talk about a very important topic.

[B]

Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.