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Use the Appropriate Tax Clause - 3 Clauses (4 Pages)

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CLAUSE 1: All Estate and Inheritance Taxes Arising on the Decedent’s Death to Be Paid from the Residue of the Estate without Apportionment Against Any Beneficiary 

CLAUSE 2: Taxes to Be Paid from the Credit Shelter Portion of the Estate; If an Interest in a  QTIP Trust is Held by the Decedent, the Tax Due on the QTIP Trust Portion is to be Paid from the QTIP Trust Property

CLAUSE 3: Address the Generation-Shipping Transfer Tax that may be Payable as the Result of a Taxable Termination 

Using the correct tax clause in a Will is a very important consideration. Generally, if taxes (federal estate taxes, state estate and inheritance taxes) are taken from a share passing to a spouse or to charity, such taxes will reduce the otherwise available marital or charitable deduction and increase the tax liability of the estate. This issue is included specifically on the federal estate tax return (Form 706) and is highlighted in the IRS Estate Tax Auditor’s Manual. When such a tax increase is warranted, there is a circular algebraic calculation required, and the resulting tax increase to the estate can be significant.

Accordingly, most documents are drafted with specific provisions to have any applicable taxes come first from the residuary estate of the decedent (to avoid reducing any specific bequests made by the testator). Consider whether taxes due on property passing from the decedent to beneficiaries outside the Will (non-probate property) should also be paid from the residuary estate. Items such as retirement plan benefits, life insurance policies and property held in joint names with right of survivorship should be considered here. Where there is no credit shelter trust involved, and the testator wishes to protect the non-probate property from responsibility for estate taxes, a rather straightforward clause charging all taxes to the residue is used. Such a clause is provided in (Clause 1, below). Where there is a credit shelter trust and a marital deduction involved, planning suggests that the marital deduction share should be protected from contributing to any tax liability, so if taxes are due, they should be taken from the credit shelter portion of the estate. Such a clause is provided in (Clause 2, below)...

Steven G. Siegel is president of The Siegel Group, a Morristown, New Jersey - based national consulting firm specializing in tax consulting, estate planning and advising family business owners and entrepreneurs. Mr. Siegel holds a BS from Georgetown University, a JD from Harvard Law School and an LLM in Taxation from New York University.

He is the author of several books, including: Planning for An Aging Population; Business Entities: Start to Finish; Taxation of Divorce and Separation; Income Taxation of Estates and Trusts, Preparing the Audit-Proof Federal Estate Tax Return, Putting It Together: Planning Estates for $5 million and Less, Family Business Succession Planning, Business Acquisitions: Representing Buyers and Sellers in the Sale of a Business; Dynasty Trusts; Planning with Intentionally-Defective Grantor Trusts; The Federal Gift Tax: A Comprehensive Analysis; Charitable Remainder Trusts, Grantor Trust Planning: QPRTs, GRATs and SCINs, The Estate Planning Course, The Retirement Planning Course, Retirement Distributions: Estate and Tax Planning Strategies; The Estate Administration Course, Tax Strategies for Closely-Held Businesses, and Tort Litigation Settlements: Tax and Financial Issues.

Mr. Siegel has lectured extensively throughout the United States on tax, business and estate planning topics on behalf of numerous organizations, including National Law Foundation, AICPA, CCH, National Tax Institute, National Society of Accountants, and many others.  He has served as an adjunct professor of law at Seton Hall and Rutgers University law schools.

The Siegel Group provides consulting services to accountants, attorneys, financial planners and life insurance professionals to assist them with the tax, estate and business planning and compliance issues confronting their clients. Based in Morristown, New Jersey, the Group has provided services throughout the United States. The Siegel Group does not sell any products. It is an entirely fee-based organization.

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