A new law was recently enacted in New York which may affect the estate plans of decedents dying in 2010 leaving wills or revocable trusts governed by New York law. As you are likely aware, as of January 1 of this year, the federal estate and generation-skipping transfer ("GST") taxes were repealed and will be reinstated on January 1, 2011, with higher rates and lower exemption amounts than those in place in 2009, unless Congress acts prior to such reinstatement. Many estate planning documents executed prior to this year included, for good reason, so- called "formula clauses," used to carve out an amount equal to the decedent's exemption from federal estate tax (often referred to as the "credit shelter" amount, which was $3.5 million in 2009) and/or the decedent's remaining exemption from GST tax (the "GST exemption," which was also $3.5 million in 2009). Often, such formula clauses included a bequest to a separate "credit shelter trust," using a phrase such as "the maximum amount which can pass free of federal estate tax," or alternatively a bequest to a surviving spouse or a marital trust, using a phrase such as "the minimum amount necessary to avoid imposition of a federal estate tax." The repeal of the federal estate and GST taxes thus could result in the disposition of the estate of a decedent dying this year in a manner contrary to the intent of such decedent; for example, such formula clauses can be interpreted as disposing of a decedent's entire estate to the credit shelter trust, which may have the effect of disinheriting the surviving spouse under certain wills or revocable trusts.
The new law attempts to avoid such unintended consequences by providing that wills or revocable trusts of decedents dying this year which contain such formula clauses will be interpreted to refer to the federal law regarding estate and GST tax as it existed on December 31, 2009. For example, if a decedent dies this year leaving a will executed in a prior year in which "the maximum amount which can pass free of federal estate tax" passes to a credit shelter trust with the remainder of the decedent's estate passing to the surviving spouse, the will would now be interpreted as making a bequest of up to $3.5 million to the credit shelter trust, with the remainder of the estate passing to the surviving spouse. This legislation will not apply to wills or revocable trusts which were executed or amended in 2010, or which were executed prior to 2010 but take into account, and provide for an alternate disposition in anticipation of, the repeal of the federal estate and/or GST tax.
The law also provides that any affected beneficiary or the executor or trustee may bring a proceeding within a year of the decedent’s death to determine whether the decedent intended that the formula clause be interpreted as the law existed at the decedent’s death.