Provides for the interpretation of trust and will clauses relating to federal estate taxes and generation-skipping transfer taxes when the decedent dies during 2010

Many wills, trusts and beneficiary forms prepared prior to 2010 were based on formula dispositions in the case of married testators. The aim was typically to leave as much as possible on the first spouse's death to a trust or to individuals other than the surviving spouse (typically issue of the decedent) without causing estate tax on the first spouse's death. This was commonly referred to as a "credit shelter bequest", since the amount involved ($3.5 million for decedent dying in 2009) would be sheltered from estate tax on the first death by a "unified credit" allowed under the Internal Revenue Code. The credit shelter bequest is not subject to estate tax at the surviving spouse's death.

The credit shelter bequest is usually phrased in terms of the maximum amount that can pass free of Federal estate tax on the first death, or in terms of like effect. The same results were obtained with formulas leaving a spouse outright or in a form qualifying for a marital deduction against the Federal estate tax, the minimum amount necessary to avoid imposition of an estate tax on the first spouse's death. With repeal of the estate tax, these formula clauses could be interpreted to leave the entire estate in a credit shelter disposition and nothing to the spouse or in a form qualifying for a marital deduction. This conclusion is reached since the entire estate and not just the part formerly sheltered by statutory credits can now pass under a credit shelter disposition without there being any estate tax.

The Federal generation-skipping transfer tax is also temporarily repealed for transfers in 2010. Many wills and testamentary instruments also left to grandchildren (or to trusts that would eventually pass to grandchildren) maximum amounts allowable without imposition of a Federal generation skipping transfer tax. With

repeal, this amount is now unlimited, and may pass to grandchildren to the detriment of the decedent's children.

The purposes of the bill, accordingly, are:

1. To preserve the form in which most testators expected their estates to be divided prior to the unexpected repeal of the Federal estate tax;

2. To assure that a surviving spouse will not be disinherited and left to exercise a right of election under Article 5 of the Estates, Powers and Trusts Law;

3. To shelter assets in a credit shelter disposition for the time estate tax may be reinstated;

4. To prevent unwarranted amounts from passing to grandchildren to the detriment of children.

Summary of provisions

The bill, which applies to assets that are distributed upon the death of a decedent through a will or revocable trust, amends the Estates, Powers and Trusts Law to provide that a formula in a will, or trust executed or created prior to January 1, 2010 providing, in sum and substance, for a bequest of an amount of property that can be sheltered from Federal estate tax by reason of credits against such tax, shall be construed under the Internal Revenue Code of 1986 as in effect for decedents dying on December 31, 2009, in the case of a decedent who is survived by a spouse, and who dies during 2010 at a time when the Federal estate tax is repealed. The Federal estate tax is not deemed repealed if it is legally reinstated retroactively to the time of the decedent's death. This legislation does not apply to irrevocable trusts.

Similarly, if a will or revocable trust executed or created prior to January 1, 2010 contains a bequest which in sum and substance refers to the decedent's unused exemption from the federal generation skipping transfer tax, then such bequest shall, be construed under the Internal Revenue Code of 1986 in effect on December 31, 2009 with respect to generation skipping transfers on such date. This applies in the case of a decedent who dies during 2010 at a time when the federal generation skipping transfer tax is not in effect. Again, the federal generation skipping transfer tax is considered to be in effect if legally reinstated retroactively to the date of decedent's death.

This legislation also includes a provision exempting any will or trust that already has provisions drafted by the testator determining what should happen with formula clause provisions in the event that estate or generation-skipping transfer tax is repealed.

Finally, this legislation provides that any affected beneficiary or the executor or trustee may bring a proceeding within a year of the decedent's date of death to determine whether the decedent intended that that the formula clause be construed with respect to the law as it existed on the decedent's date of death (rather than on December 31, 2009). In that regard, the legislation also provides that extrinsic evidence may be admitted to establish the decedent's intent.

Existing law

Existing Law following repeal of the Federal estate tax and generation skipping transfer tax is unclear. It is conceivable that all of a decedent's property may be held by a court to pass under a credit shelter disposition to the detriment of a surviving spouse.

It is also possible that a decedent's children may be deprived of property all of which is held to pass under a bequest of a decedent's unused exemption from the Federal generation skipping transfer tax.

Justification

Without this legislation, due to the repeal of federal estate and generation skipping tax, when there is a formula clause in a will, the intent of the testator cannot be carried out or determined through a construction proceeding. The only remedy available is a costly right of election proceeding. This legislation will therefore avoid needless litigation to the benefit of beneficiaries of the decedent and the court system as well.

Legislative history

New bill, 2010.

Fiscal implications for state and local governments

There are no fiscal implications.

Effective date

This act shall take effect immediately, and shall be deemed to have been in full force and effect on and after January 1, 2010.