The challenge of maintaining a law blog is to keep it fresh and to make it interesting to a broader audience than attorneys. One of our recent blog entries discussed the debts of a decedent and whether a decedent’s family would be personally responsible for those debts. (Short answer – no.) This entry will explore a somewhat related topic, the three A’s of estate administration: Apportionment, Abatement, and Ademption. It comes with a promise to make it interesting and even entertaining. ( For the attorneys who may be reading this, the statutory authorities for these concepts can be found in EPTL 2-1.8 (tax apportionment), EPTL 13-1.3 (abatement), EPTL 3-4.2, 3-4.3 (ademption), and SCPA 1811 (order of decedent’s debts).
Let’s begin with a fictional Will that was admitted to probate. The names of the testator and beneficiaries are all geniuses of the Jazz piano[1] (except the two ringers for you to find).[2] The names are listed in order of their greatness, in your writer’s humble opinion. The values of the testamentary gifts are added in parentheses for later use in hypotheticals. The Will provide as follows:
I, Art Tatum, domiciled in the beautiful borough of Brooklyn in the City of New
York, being of sound mind and disposing disposition, do hereby declare and publish this my Last Will and Testament . . .
Article FIRST. I give my 1969 ZL1 Camaro (value: $450,000.00)[3] to my dear friend, Oscar Peterson. Should he predecease me, then to my devoted fan Michael P. Ryan.
Article SECOND. I give my bank account and all its contents at the time of my death ($400,000.00) in the Alaska Savings and Loan Association, account number 1234567, to my dear friend, Thelonious Monk;
Article THIRD.
I give my dear friend McCoy Tyner the sum of $100,000.00;
I give my dear friend Bud Powell the sum of $100,000.00;
I give my dear friend Mary Lou Williams the sum of $100,000.00;
I give my dear friend Ahmad Jamal the sum of $100,000.00;
I give my dear friend Nat Cole the sum of $100,000.00;
I give my dear friend Eddie Palmieri the sum of $100,000.00;
Article FOURTH. I give and devise my home in East Hampton, New York (value: $1,700,000.00) to my dear friend, Herbie Hancock, should he predecease me then to my dear friend Johann Sebastian Bach; and
Article FIFTH. I give all the rest, residue, and remainder of my estate wherever situate equally to my two dear friends Red Garland and Bill Evans (value: $1,850,000.00).
Total estate:
$ 450,000.00
400,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
1,700,000.00
5,000,000.00 gross probate estate
Hypothetical 1: The estate owes the IRS an estate tax of $300,000.00 , and the Will is silent as to how those taxes are to be paid. Who pays the tax?
Answer: Because the Will is silent on the payment of taxes, the tax is apportioned equally among the beneficiaries under EPTL 2-1.8. ($300,000 ÷ $5,000,000 = 0.06, or 6%). Therefore, each beneficiary must contribute 6% of his or her legacy to the taxes. If one or more balks? The relevant statute covers that situation and empowers the executor to bring suit to collect the share and to receive legal fees for the effort. But the IRS doesn’t care and holds the executor primarily liable for the payment, and requires the fiduciary to “chase” the beneficiary for reimbursement.
Hypothetical 2: What if the Will contained a provision that read, “All taxes of my estate are to be paid as administration expenses.”
Answer: The governing statute, EPTL 2-1.8, is a default statute and can be varied by the will. Here, the Will requires the taxes be paid from the residuary estate. Did the testator intend that result? Does an attorney ever discuss with a client the tax payment clause? Who knows? Here, the $300,000 comes out of the residuary bequest to Red Garland and Bill Evans.
Hypothetical 3: If Art’s estate owes Louis Armstrong[4] the sum of $2,450.000.00, how is the debt discharged from estate assets?
Answer: Debts of the decedent, apart from taxes, are paid in an order established by statute, EPTL 12-1.2 (unless changed by the will). The order of payment is: distributees; then residuary beneficiaries, then general or demonstrative beneficiaries, and then finally from specific beneficiaries. Therefore, the entire residuary gift to Red Garland and Bill Evans is wiped out and so too are all of the general legacies to McCoy Tyner, Bud Powell, Mary Lou Williams, Ahmad Jamal, Nat Cole, and Eddie Palmieri.($1,850,000 + $600,000 = $2,450,000)
Hypothetical 4: If Art’s estate owes Miles Davis[5] the sum of $3,000.000.00, how is the debt discharged from estate assets?
Answer: Once the residuary estate and the general bequests are wiped out, the estate is left owing Mr. Davis the sum of $550,000. That sum must be paid from the specific bequest of the Camaro, the specific bequest of the bank account, and the specific devise of the beach house. Their value exceeds the amount owed ($2,550,000 vs. $550,000). The amount owed is app. 22% of the value of these testamentary gifts so each beneficiary should contribute that share to the remaining amount owed. If not, then there are remedies for the executor but we need not get into that.
Hypothetical 5: If Art’s estate owes the IRS an estate tax of $3,000,000.00, and if Art’s estate owes Dizzy Gillespie a debt of $4,000,000.00, then how are these liabilities paid?
Answer: This one is easy, the obligations are more than the estate’s value. The IRS gets its $3,000,000. The IRS always gets its money The remaining $2,000,000 of assets in the estate are sold and the proceeds used to pay the debt to Mr. Gillespie. In other words, the creditor gets $0.50 on the dollar. Can Mr. Gillespie choose to take the assets in kind? Yes, and they may be excellent investments.(Especially that Camaro.)
Hypothetical 6: If Art’s estate owes its attorneys and accountants $1,000,000.00, and if Art’s estate owes Clifford Brown a debt of $2,000,000.00, then how are these liabilities paid?
Answer: Administration expenses like attorneys’ fees, accountants’ fees, etc., are favored more than private debts, more then taxes in many respects. If they weren’t, then who would ever represent an estate? Here, the $1 million in fees reduces the residuary from $1.85 million to $850,000. Mr. Brown gets that $850,000 and the remaining $1,150,000 he is owed wipes out the general bequests totaling $600,000, leaving an amount still owed of $550,000 that must be shared by the beneficiaries as calculated in Hypothetical 4.
Hypothetical 7: If Art’s estate owes its attorneys and accountants $1,000,000.00, and if Art’s estate owes Wynton Marsalis a debt of $2,000,000.00, Arturo Sandoval a debt of $2,000,000.00, and Fats Navarro a debt of $2,000,000.00, then how are these liabilities apportioned?
Answer: Again, as in Hypothetical 6, administration expenses like attorneys’ fees, accountants’ fees, etc., are favored. Here, the $1 million in fees reduces the residuary from $1.85 million to $850,000.The remaining value of the estate ($4 million) is less than the debts owed of $6 million. Therefore, each creditor receives 2/3 of the amount owed ($4 million / $6 million).
Hypothetical 8: Before his demise, and through no fault of his own, Mr. Tatum’s Camaro was totaled in an accident. The insurance proceeds were paid to his executor a month after his death. Do the insurance proceeds belong to the specific legatee, Oscar Peterson? If not, then how are they distributed?
Answer: Yes, but only because they were paid post-mortem. If they were paid to Mr. Tatum before he died, then they would be assets of the residuary estate (EPTL 3-4.5) and the bequest to Mr. Peterson would “adeem” (i.e., end, be ineffective) and he would be entitled to nothing from the estate.(Likewise, if Mr. Tatum no longer owned the beach house when he died, then Herbie Hancock is entitled to nothing from the estate.).
Thank you for coming this far. If anyone would care to dispute my ranking of these greats, please feel free to let me know and we can battle it out. Future efforts will next deal with the great drummers, bassists, saxophonists, etc. Consider yourself warned.
And last but not least, this blog entry is being published on the occasion of Bob Dylan’s 80th birthday. Happy birthday, sir, many healthy and happy returns of the day to our most worthy Nobel Laureate.
[1] Inspired by the music itself, and the opinions of Dr. Billy Taylor and Max Roach, your writer prefers the term “American Classical Music” as a companion to “European Classical Music.” It was difficult to leave out many other artists, but what can one do? Duke Ellington, Count Basie, Horace Silver, Bebo Valdéz, Chucho Valdéz, James P. Johnson, Dave Brubeck, Chick Corea, Earl Hines, Fats Waller, Erroll Garner (who does not own a copy of his “Concert by the Sea”?), Eddie Palmieri, Ramsey Lewis, Joe Zawinul, Brad Mehldau, Albert Ammons, Keith Jarrett, Kenny Barron, Wynton Kelly, Cecil Taylor, Dr. Billy Taylor. All great, all worthy of your attention. And then there is the “younger” generation of musical genius like Hiromi, Gerald Clayton, Vijay Iyer, Gonzalo Rubalcaba, Renee Rosnes, Bill Charlap, Fabian Almazan, Ashley Henry, and many others.
[2] Of the two ringers, one of them no more belongs on this list than does Fred Flintstone, the other is a Baroque genius who could swing with any of these artists. In fact, the Baroque period of the European Classical tradition shares many features with the America Classical tradition, i.e., Jazz – the musical inventiveness, the love of improvisation, origins in dance rhythms, roots in religious music, speed, experiments with harmony and melody, and the “cutting” contests between masters.
[3] Yes, $450,000. This Camaro was among the most beautiful and perhaps the rarest, meanest muscle car ever to come off the American assembly line. Few did, hence their current value.
[4] The creditors are the immortals of the trumpet, again listed in order of importance, in your writer’s opinion. Feel free to mock, criticize, or change my order in the comments if you like. Who among us does not own an album by Louis Armstrong?
[5] Who among us does not own the album Kind of Blue? You don’t? Shame on you.