In the Newell case in Wyoming, controversy arose over the will of Ms. Newell, deceased, as between two grandsons as beneficiaries and two nephews as specific devisees. The question was whether the estate of Ms. Newell paid the state and federal taxes on money and income in the estate, or whether taxes should be paid by the beneficiaries and devisees.
In other words, the question is, who pays taxes on the income of the estate, and who pays expenses--the estate or the beneficiaries?
Wyoming courts since 1939 have given guidance on this question, as follows:
A specific legacy is a bequest of a specific article of the testator's estate, distinguished from all others of the same kind, as for example, a particular horse, or collection, or money. By contrast, a general legacy is a gift of a certain amount of money without pointing out any source from which the amount is to be paid.
In the Newell case, the source of the funds was payments on an installment contract. Ms. Newell had bequested the ranch to her grandsons. The ranch was then sold, and installment payments were paid to her estate for two years before she died.
The answer to the question of who or what pays taxes on the installment contract income turns on the provisions in your will. In Wyoming, in the absence of a provision to the contrary in a will, a specific bequest also "carries accretions accrued after the testator's death". That means where there is no contrary provision in the will, the interest after death is attributed to the specific bequest for estate distribution. In this case, the income from installment payments for the ranch would be attributed to the specific devisee in the bequest, in this case the grandsons, who would pay the tax and expenses if any--not the estate. In particular, the court found that the proceeds from a real estate installment contract constituted a specific devise under the will.
On the question of whether expenses are paid from the income of the estate or from the income of the beneficiaries, again this question turns on the direction of the decedent's will. Under Wyoming's statute W.S. 2-10-103 unless otherwise provided, the expenses shall be paid first out of the income of the estate received by the personal representative, then from the residue of the estate.
In particular, the language of the deceased's will provisions are analyzed to show how the deceased wished the tax to be apportioned. The statute provides that "unless the will otherwise provides, the tax shall be apportioned among all persons interested in the estate".
What this means is that: it depends on what your will provides. Let's unpack those particulars:
1. What gifts or beneficiaries are free of the burden of taxes?
2. What taxes are affected?
3. Where is the burden of taxes shifted?
For example, where the will stated "I direct payment of all my just debts, taxes, funeral expenses and expense of administration of my estate"--the court found this terminology to be sufficient to require payment of federal estate taxes without apportionment, but insufficient for state inheritance taxes not to be apportioned.
Compare that language with this: "All inheritance and estate taxes owing by reason of my death shall be paid from my probate estate, without apportionment, notwithstanding any state or federal law to the contrary". This provision clearly and sufficiently expresses the intent that both inheritance and estate taxes were not to be "apportioned" among all persons interested in the estate.
In the Newell case the bequest to Ms. Newell's heirs is a specific devise and so were the installment payments which means the taxes were paid by those heirs. The installment payments did not create "income to the estate".
A second Wyoming statute, W.S. 2-3-605, further clarifies how income from the assets of a decedent's estate after the death of the testator and before distribution, provides distribution as follows:
(i) To specific legatees and devisees, the income from the property devised to them respectively, less taxes, ordinary repairs and other expenses of management and operation of the property, and an appropriate portion of interest accrued since the death of the testator and of taxes imposed on income, excluding taxes on capital gains, which accrue during the period of administration".
The most important takeaway is that it is crucial what your will says regarding payment of taxes. This is so whether you have a trust or not, because even with a trust you would typically have a pourover will that makes the tax payment provision.
I would be pleased to review your estate plan with you to determine how taxes are paid. Taxes paid on income when you have a pourover will into a Trust Agreement can also be analyzed and would be a topic for a separate analysis. Please call 307.200.1014 for a free telephone consultation or videoconference.