The problem-when the residuary estate doesn't cover tax liability
Even with these two well-settled principles, a problem arises if the residuary estate is insufficient to pay the taxes and the decedent's will directs that the estate's taxes be paid from the residuary estate without contribution from other assets.
Overruling its decision in Fry, the court in Williams concluded that the direction to pay taxes from the residue without apportionment or reimbursement merely reflected an intent to prohibit the residuary beneficiary from recovering from the recipients of nonprobate assets or specific bequests any portion of the taxes actually paid by the residuary estate.
Although the probate estate was sufficient to pay the taxes if the specific and general bequests were to abate, the executor instead argued that the taxes should be apportioned among the probate and nonprobate assets due to the insufficiency of the residuary estate.
However, in Letter Ruling (TAM) 9434004,(93) a will required taxes to be borne by the residuary estate
In Marine,(66) after several years of chronic alcoholism and diminishing mental capacity, the taxpayer executed a will that bequeathed his residuary estate to two charitable organizations.
The executor based the charitable deduction on the value of the decedent's residuary estate after reduction for only those administration expenses that were charged against principal.
Finally, the Fifth Circuit stated that a Texas probate court settlement is wholly valid and binding under Texas law: "Texas law control[s] the extent to which the administrative expenses are charged to the residuary estate .
In light of the above, the IRS ruled that the disclaimers were timely under the statute and met the requirements of a fractional-interest disclaimer, as the shares retained from the residuary estate were severable property within the meaning of Regs.
In Robertson,(24) the decedent bequeathed most of his residuary estate to three separate marital trusts.
In IRS Letter Ruling 9148018,(84) the decedent left his residuary estate to a trust which provided that the net income "shall be paid to or used and expended for the benefit of my [spouse] at convenient intervals for and during her lifetime.
In addition, the decedent's children concurrently filed a disclaimer of any interest in the income or principal of the residuary estate during the remaining life of the surviving spouse.