IRC 2207: Estate Tax Right of Recovery Explained
Learn how a default federal rule dictates who pays the estate tax on certain assets and why specific language in an estate plan is needed to alter it.
Internal Revenue Code (IRC) Section 2207 provides a rule regarding the payment of federal estate taxes. It establishes a default mechanism allowing an estate’s executor to seek reimbursement for a portion of the estate tax from individuals who inherit certain types of property. This right of recovery applies when a person receives property that was subject to the decedent’s control through a “general power of appointment.” The rule is designed to ensure the tax burden associated with such property falls on the recipient, rather than being paid from the decedent’s other assets, and it applies automatically unless the decedent directs otherwise in their will.
Triggering the Right of Recovery
The right of recovery is triggered by a “general power of appointment,” which is a right granted to an individual to determine who will receive certain property. A power is considered “general” if the holder can appoint the property to themselves, their creditors, their estate, or the creditors of their estate; this level of control is treated as akin to outright ownership for tax purposes. For this recovery right to apply, the property must be included in the decedent’s gross estate for federal estate tax purposes specifically because of this power, as dictated by IRC Section 2041.
If the property is part of the gross estate for another reason, this specific recovery right is not available. The executor’s right to recover the tax arises only after the federal estate tax has been paid by the estate. This ensures that the government receives its payment before any internal reimbursement occurs among the estate and its beneficiaries.
Determining the Recoverable Tax Amount
The calculation for the amount of estate tax an executor can recover is based on a pro-rata formula. This method ensures the recipient of the property pays a proportionate share of the total estate tax. The recoverable amount is determined by multiplying the total tax paid by a fraction: the value of the property included due to the power of appointment divided by the value of the decedent’s total taxable estate.
To illustrate, consider an estate where property valued at $2 million was included because the decedent held a general power of appointment. If the decedent’s total taxable estate is $10 million and the total federal estate tax paid was $2.5 million, the executor would divide the $2 million property value by the $10 million taxable estate, resulting in a ratio of 0.20. This ratio is then multiplied by the $2.5 million tax bill, yielding a recoverable amount of $500,000 from the person who received the property.
Directing Tax Payments in an Estate Plan
A decedent can prevent the automatic application of this right of recovery, but it requires careful and specific language in their will. The law states that the recovery right applies “unless the decedent directs otherwise in his will.” This gives individuals the power to override the default rule and specify how they wish the estate tax burden to be allocated, a decision formalized in a tax apportionment clause.
Simply including a general directive to pay all taxes from the residuary estate—the assets remaining after all specific gifts have been made—may not be sufficient to waive the recovery right. Courts have sometimes interpreted such general clauses as not specific enough to override the federal law. To ensure the decedent’s wishes are honored, the tax clause should make a direct reference to the power of appointment or the recovery statute itself.
Similar federal recovery statutes exist for other types of assets that pass outside of a will, such as life insurance proceeds and Qualified Terminable Interest Property (QTIP) trusts, but they have key differences. For the power of appointment property and life insurance, the decedent must include a specific directive in their will to override recovery. For other provisions, such as those for QTIP trusts, that directive can be in either the will or a revocable trust.
The calculation methods also differ. While this recovery uses the pro-rata formula, the right for QTIP trusts calculates the recoverable amount on a marginal basis—the actual increase in estate tax caused by the inclusion of the property. Because of these nuances, a comprehensive tax apportionment clause that clearly addresses these potential recovery rights is an important component of a well-structured estate plan.