The Risk Manager, Winter 1997

Two years ago we alerted you to a malpractice risk concerning boilerplate in wills. The issue centers on the standard residuary clause used in many wills directing that all taxes be paid out of the residue of the estate. This clause surfaced as a problem as more people used non-probate techniques to transfer assets at death. For example if non-probate assets go to one other than a residual beneficiary, but the estate must pay the taxes on those assets, the spouse could receive substantially less than intended. This boilerplate may also cause problems when the decedent has children by a former marriage. In dividing the estate between a surviving spouse and these children one or the other may end up paying all of the tax, thus receiving considerably less than the decedent intended. The disgruntled beneficiaries can be counted on to blame the lawyer who drafted the will.

To avoid this malpractice risk be alert to situations when:

  • A will leaves a fractional share to a spouse or a charity.
  • A will includes a partial QTIP election.
  • Non-probate assets include items such as life insurance, pension benefits, living trusts, powers of appointment over property, and jointly owned property.

In preparing wills:

  • Always discuss the issue of who pays taxes. Assume at the outset that each asset ought to bear its share of the tax -- then get specific instructions from the client.
  • Clients will often prefer that taxes on a very large specific bequest or non-probate asset come from that asset -- but not always so check it out.
  • When non-probate assets such as a pension are to be paid out in installments but all taxes are incurred immediately, consider these assets for favored tax treatment. Again get the client’s guidance.
  • Ask a lot of questions about non-probate assets to be sure you have the whole picture.
  • Be careful of specific bequests of uncertain value which could balloon the tax burden of the residual beneficiary (e.g., antique car to a daughter).
  • If the will is to be silent on tax, be sure you inform the client how taxes will be apportioned among assets.
  • Document the information obtained from the client about non-probate assets, advice given, and client tax decisions on how the will is to treat taxes.
  • Review all wills you have prepared to see if boilerplate creates a problem. Consider whether the client’s estate may have substantially changed thereby altering tax consequences.

(Source: Lawyers Weekly USA, Boilerplate In Many Wills Is Causing Tax Problems, 94 LWUSA 1134, 12/5/94; Boilerplate in Wills Causes Tax Problems, 96 LWUSA 100, 1/29/96; Boilerplate in Will Costs an Estate Over $300,000 in Taxes, 96 LWUSA 505, 6/3/96; ‘Boilerplate’ in Wills Causes More Problems; ‘Hot Issue’ for the IRS, 96 LWUSA 1025, 11/18/96.)