If the Senate doesn’t get its act together, it it looks like it won’t, the estate tax is going to expire on December 31, 2009. As I’ve written many times before, this is just a one year vacation from the estate tax. It is scheduled to come back with a vengeance on January 1, 2011. Not only that, Congress can retroactively change it even after January 1 of next year.
What worries me the most however, is not the notion of people throwing momma from the train in order to have their relatives die in a year without an estate tax. What really keeps me up at night is all of those documents that are already out there that use formula clauses to dispose of the estate.
Remember the following (1) the lifetime exemption is currently $3.5 million; (2) there is an unlimited marital deduction — meaning you can leave an infinite amount to your spouse tax-free.
Let’s look at the following example:
H has $9 million in assets. He is married to W, his second wife, and has three children, C1, C2, and C3 from a prior marriage. H wants to provide for both his wife and his children upon his death, and to pay no estate tax. H’s will says:
“A. I give, devise, and bequeath to my wife the minimum pecuniary amount necessary to reduce to zero the federal estate tax owed as a result of my death.
B. After the distribution set forth in Paragraph A above, I give, devise, and bequeath the rest, residue and remainder of my estate to my children, in equal shares, share and share alike if living, and if not, then to his or her respective issue per stirpes.”
If the exemption is $3.5 million, as it is now, then the children receive $3.5 million to split 3 ways, and the wife gets $5.5 million, which because of the marital deduction is not subject to tax. The minimum pecuniary amount necessary to reduce the estate tax to zero means that the kids get the maximum amount of the lifetime exemption.
Now we’re in 2010. H dies. There is no estate tax. The kids hate their stepmother who is younger than all of them. The kids argue that because there is no estate tax, the minimum amount necessary to reduce the estate tax to zero is. . zero! Stepmom gets nothing. Stepmom argues that the polestar of will construction is the intent of the testator, and the clear and unambiguous intent of H was to provide for W and not to give her nothing. (Ignore elective share statutes for this post).
I don’t know who wins the above lawsuit but I know one thing. The loser is going to sue the estate planning attorney for malpractice.
And that’s just one example of a formula. There are many different variations and permutations. Every single estate planning attorney uses some sort of formula in their document — whether pecuniary or fractional; whether based on the lifetime exemption, or the marital deduction. These documents are all out there, and none of them “work” in a world of no estate tax.
I could advise my clients that they need to change their documents.
But to what? Congress is going to change the law. Maybe. I think that the documents are going to have at least three sets of alternatives depending on what Congress does.
And clients already complain that the documents are too long.