On July 1, 2020, the new Mississippi Uniform Estate Tax Apportionment Act went into effect under Sections 33-46 of S.B. 2851, replacing the old Uniform Estate Tax Apportionment Act under Title 27 Chapter 10 of the Mississippi Code.
What does apportionment of estate taxes mean anyway?
Apportionment of estate taxes is the determination and allocation of liability for estate taxes among assets of the estate (however defined). In short, tax apportionment determines whose inheritance (or trust interest) is responsible for how much of any estate tax bill.
Why did we replace the old Uniform Estate Tax Apportionment Act (Miss. Code Ann §27-10-1, et seq.) (“Old Act”)?
History of the Old Act
The Old Act was actually a version of the Uniform Estate Tax Apportionment Act (“Uniform Act”), originally drafted in the 1960’s. Mississippi enacted the Old Act in H.B. 1000 on March 14th, 1994 and it became effective on January 1st, 1995. The Old Act could be found in Title 27, Chapter 10 of the Mississippi Code.
Why did we need to change the Old Act?
At the time of the drafting (not enactment) of the Old Act, a person’s Last Will and Testament was the primary means in which to transfer assets at death. Since that time, other instruments, including revocable trusts, have become much more prevalent and commonly operate as Will substitutes. The federal estate tax regime has undergone many changes as well and the Old Act does not take into account many of the changes made. Additionally, the Old Act created some issues when trying to address apportionment among assets includible on one’s taxable estate yet not part of that person’s probate estate (i.e. in trust). In short, much as changed since the 1960’s. New types of entities exist, Will alternatives, in many forms, exist, and the federal estate tax environment itself has undergone tremendous change.
What is the Mississippi Uniform Estate Tax Apportionment Act (“New Act”)?
The New Act, being Sections 33-46 of S.B. 2851 and Miss. Code Ann. § 91-25-1, et seq. addresses many issues with the Old Act. First, the New Act moves the apportionment laws of Mississippi from Title 27 (Taxation and Finance) to Title 91 (Trusts and Estates). It also brings the Old Act about 50 years forward as the New Act is based on the 2003 version of the Uniform Act and addresses many issues that have arisen with time, practice, and other relevant law changes, including the following:
Apportionment can now be made by instruments other than a Will.1
For many, probate may not be necessary. This can be the result of an effective utilization of Will substitutes, including revocable trusts, payable on death or beneficiary designations, or joint interests. For those with a taxable estate and no desire or other need to probate a Will (generally a pour over Will in such cases), the Old Act essentially makes probate necessary in some cases where, but for enforcing a decedent’s chosen method of apportioning of estate taxes, probate is unnecessary due to effective planning.2 The New Act changes this by unequivocally giving decedents the ability to select how estate taxes will be apportioned in a revocable trust.3 However, one should exercise caution as apportionment under a revocable trust is only effective to the extent estate tax is not already apportioned under a Will.4 Lastly, apportionment of estate taxes may be made under another dispositive instrument with respect to the estate taxes attributable to the assets disposed of under such instrument if unaddressed in a Will or revocable trust.5
Definitions are updated to bring current with other new laws and changes.
As a baseline matter, certain terms have different meanings now than they did back in the 1960s. First, one might note that generation-skipping taxes (an additional wealth transfer tax for those who fail properly plan and are begging for an estate tax victory lap) are not mentioned in the Old Act.6 The answer is an easy one. The generation-skipping tax did not arrive until around a decade after the Old Act was originally drafted, 1976, as part of The Tax Reform Act of 1976 (subsequently repealed and replaced in 1986). Additionally, the term “person” in the Old Act does not include reference to, among other things, limited liability companies.7 Again, limited liability companies did not exist at the time the Old Act was passed.
Statutory apportionment (and other items relevant to determining apportionment) provisions are updated.
As a starting point, the statutory apportionment provisions come into play as a safety net and provide how the estate tax (and generation-skipping tax) are apportioned among the parties having interests in the decedent’s gross estate, as determined for estate tax purposes. In short, if a decedent’s Will or revocable trust (or other instrument in the case of the New Act) fails to provide for apportionment, the statutory provisions determine apportionment. So as a threshold matter, it would make sense that the statutory scheme would, as a default, cover all necessary bases. Unfortunately, the law is ever-changing with the times and the New Act delivers on addressing many pitfalls encountered in the Old Act.
The Old Act merely apportioned the estate tax among those with an interest in the gross estate (for federal tax purposes) of the decedent, using the figures utilized in determination of the estate tax liability to calculate apportionment.8 As a backstop, the chancery court, upon petition, may determine apportionment.9 Additionally, the Old Act gave the chancery court a statutory equitable power to apportion interest and penalties in a manner other than required in the Old Act.10 The Old Act also provided a means to collect from those holding assets subject to apportionment outside of the decedent’s probate estate.11 The Old Act also provided for an exclusion from apportionment for estate tax deduction-qualifying and even non-qualifying marital, charitable, and public trusts. With respect to time-based interests (temporary and remainder interests),12 the tax paid on the temporary interest and remainder would be chargeable against the corpus of the property or funds subject to the temporary interest and remainder.
The Old Act provided for exoneration of the estate’s fiduciary (or other person required to pay the estate tax) if the fiduciary institutes a collection suit after the 3-month period following the determination of the estate tax. To the extent funds were not recoverable, the uncollected amounts would be paid from the residuary probate estate. To the extent the residuary was inadequate to make payment, the law directed to look to the other persons interest in the estate subject to apportionment. As a last matter, the Old Act provided for reciprocity and coordination with any estate taxes charged by other states should the other states offer similar reciprocity.13
The New Act is much more expansive and addresses apportionment with tremendously more breadth than the Old Act.14 In a short and sweet manner, the New Act apportions ratably, based on the “value” (excluding any associate debt and not accounting for any special valuation adjustment or taxes paid or required to be paid), the “apportionable estate” among those persons with an interest in the estate, save for a few helpful adjustments. These adjustments address specific allocation of direct-skip-related generation-skipping taxes, inclusion in a decedent’s gross estate because of the application of IRC § 2044 (ex. a marital trust qualifying for the marital deduction), and time-limited interests. In the case of a generation-skipping tax liability from a direct-skip, the tax liability is directly apportioned to the person receiving the property attributable to the tax liability only. In the case of a marital trust inclusion issue, the difference between the total estate tax for which the decedent’s estate is liable and the amount of estate tax for which the decedent’s estate would have been liable if the property had not been included in the decedent’s gross estate is apportioned ratably among the holders of interests in the property in the marital trust.15
Additionally, the New Act provides for more expansive provisions addressing time-limited interests and recapture of benefits from spousal shares that previously qualified for deductions or charitable deductions.16 The New Act also provides for a prioritized list of parties from which a fiduciary may collect estate tax. The priority is as follows:
- Any person having an interest in the apportionable estate which is not exonerated from tax;
- Any person having an interest in the apportionable estate; or
- Any person having an interest in the gross estate.17
To protect the priority list and the integrity of the apportionment when one party pays more than its allocable share of estate tax, the New Act provides a right to reimbursements to equalize the apportionment as well as statutory standing (and even obligation) for the estate’s fiduciary to sue to enforce the right on behalf of that party.18
Takeaways from the New Act
A major takeaway from the New Act is that it brings Mississippi’s means of statutory apportionment of estate tax (mostly) current with the times and expands preexisting law to provide for more means of ensuring integrity in the application of the statutory apportionment. However, given the new ability of a decedent to select a method of apportionment in a revocable trust or other instrument, planners should make sure to exercise care in future estate plans which may modify a revocable trust only to include apportionment. A concern is that, given the statutory priority list, a Will trumps a revocable trust. Therefore, if someone modifies their trust yet leaves their seemingly simple pourover Will unmodified, trouble could arise. It is good to see Mississippi catch up with the times and update their statutes to be current.
- See generally, Miss. Code Ann. § 91-25-5.
- See Miss. Code Ann. § 27-10-7, providing in part that “[i]f the decedent’s will directs a method of apportionment of tax different from the method described in this chapter, the method described in the will controls.”
- Miss. Code Ann. § 91-25-5(a)(2).
- Miss. Code Ann. § 91-25-5(a)(1), (2).
- Miss. Code Ann. § 91-25-5(a)(3).
- Miss. Code Ann. § 27-10-5(f) defining the term “tax” which references specifically the estate tax.
- See Miss. Code Ann. § 27-10-5(d).
- See Miss. Code Ann. § 27-10-7, but note the definition of “tax” in the Old Act fails to address other taxes, such as the generation-skipping tax. However, this issue is likely addressed with § 27-10-21 addressing the apportionment of “liabilities” under the “Federal Estate Tax Law.”
- Miss. Code Ann. § 27-10-9(1).
- Miss. Code Ann. § 27-10-9(2).
- Miss. Code Ann. § 27-10-9(5).
- An example would be a life estate and remainder interest.
- This type of reciprocity is common among several uniform acts such as the Uniform Interstate Depositions and Discovery Act and the Uniform Attendance of Out of State Witnesses Act.
- See Miss. Code Ann. § 91-25-5(3) defining the term “estate tax” to specifically address and include direct-skip generation-skipping transfers.
- In application, this could result in most or all estate tax being charged to those having the interests in the trust property (ex. A decedent’s estate, otherwise not taxable due to an ample available exemption amount, is taxable due to inclusion of property held in a qualified terminable interest property trust).
- See Miss. Code Ann. § 91-25-11 and § 91-25-13.
- Miss. Code Ann. § 91-25-17.
- Miss. Code Ann. § 91-25-21.