Drafting in a Parallel Universe
A
In summary, the court concluded that if a state statute for will construction posits a world in which your ex-wife predeceased you, then your estate can’t seek reimbursement from her for payment of estate taxes, even though in (your) reality she received non-probate assets whose value was included in your taxable estate—except with respect to life insurance proceeds, in which case there’s a specific federal statute that puts you back on Earth-One, where your ex-wife still exists and must reimburse your estate.
The Facts in This Reality
Thomas H. Smoot, II died on
The court concluded that Thomas’ will contained a tax allocation clause that provided that each recipient of property included in his taxable estate was to pay a pro rata share of estate taxes, based on the value of the property that he or she received. (Incidentally, by carefully reading the tax allocation clause quoted by the court, one can become convinced that the clause doesn’t actually mean anything at all.) Thomas’ executor paid the federal estate tax and then brought a claim against Dianne for reimbursement of her pro rata share of the estate tax liability, which was calculated to be about 69.8 percent of the total.
The court considered the issues on the executor’s motion for summary judgment.
Life Insurance Proceeds
The executor sought reimbursement of estate taxes with respect to the life insurance proceeds Dianne had received. Using a fairly straightforward analysis, the court held in favor of reimbursement.
The court cited the Internal Revenue Code Section 2206, under which the executor is entitled to reimbursement for a pro rata share of estate taxes attributable to the proceeds of life insurance paid to a beneficiary other than the executor, unless the decedent directs otherwise in his will. The court held that the tax allocation clause in Thomas’ will didn’t contemplate a tax allocation scheme different from IRC Section 2206
Therefore, the court held that Dianne must reimburse the executor with respect to estate taxes paid on the value of the life insurance proceeds she received.
Other Non-Probate Assets
The executor also sought reimbursement of estate taxes with respect to the retirement assets Dianne had received. The amount at issue was
Under Georgia law, “[a]ll provisions of a will made prior to a testator’s final divorce . . . in which no provision is made in contemplation of such event shall take effect as if the former spouse had predeceased the testator . . .”2 Thomas had executed his will before he divorced Dianne, and apparently his will made no provision in contemplation of the divorce.
At this point, the court constructed the alternative reality in which Dianne had predeceased Thomas. The court reasoned that Georgia law required the will to be given effect as though Dianne had predeceased Thomas. Therefore, the tax allocation provision couldn’t be applied to Dianne, and the executor couldn’t seek reimbursement from her.
The court recognized that the outcome in this case, which produced a greater net benefit for the ex-spouse, was probably contrary to the legislative intent of the will construction statute, but the court couldn’t find an ambiguity in the statute that would mitigate Dianne’s non-existence for purposes of estate tax reimbursement.
Different Worlds; Different Results
So how could the court reconcile Dianne’s survival regarding the life insurance with her early demise as to the other non-probate assets? Although the court never alluded to the many-worlds theory, its decision seems to be a strict application of its principles.
In 1957, mathematician
So the Smoot court was saying that the Georgia will construction statute created an alternative reality in which Dianne pre-deceased Smoot, even for purposes of the tax allocation clause. Therefore, when the will was the only source of the executor’s authority to pursue estate tax reimbursement, which was the case with respect to the non-life insurance assets, the executor’s authority could only be exercised in the universe in which Dianne had predeceased Smoot (and presumably didn’t receive the non-probate assets) and thus didn’t exist as a defendant.
In contrast, the executor’s authority to seek estate tax reimbursement with respect to life insurance proceeds was granted independently by a federal statute, which wasn’t subject to the terms of Georgia’s will construction statute and, therefore, that authority could be exercised in the universe in which Dianne survived Smoot (and received the life insurance proceeds) and thus could be named as a defendant.
Lesson of the Case
It’s difficult to draft will provisions for the many contingencies that might occur in the reality in which we operate, but sometimes estate planners may even need to consider how their drafting may be given effect in a parallel universe.
Endnotes
- Smoot v. Smoot, CV 213-040 (U.S. Dist. Ct.
S.D. Georgia (March 31 , 2015). - Ga. Code Ann. Section 53-4-49.
- For a much more intelligent treatment of this subject, see Peter Byrne, “The Many Worlds of Hugh Everett,” Scientific American (
December 2007 ), www.scientificamerican.com/article/hugh-everett-biography/.
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News