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    The Lawletter Blog

    ESTATES: Impact of Repeal of Federal Estate Tax on Exemption—Calculated Bypass Trusts

    Posted by Gale Burns on Wed, Jan 12, 2011 @ 12:01 PM

    The Lawletter Vol 34 No 11, November 19, 2010

    Matt McDavitt, Senior Attorney, National Legal Research Group

    The federal estate tax officially expired on January 1, 2010, a repeal that was signed into law a decade ago as part of the Economic Growth and Tax Relief Reconciliation Act of 2001.  I.R.C. § 2210(a).  According to the Act's sunset provision, the federal estate tax will revert to pre-Act levels after December 31, 2010, absent action by Congress, but in the meantime, the absence of a federal estate tax is causing problems in administering the estates of persons dying during 2010 where bypass trusts are to be created, the funding of which is expressly tied to a federal estate tax exemption, exclusion, or the like.  Depending upon the wording of the bypass trust funding clause, the impact of the federal estate tax repeal would result in either the bypass trust's not being funded at all or the entire corpus flowing into the bypass trust.  Neither circumstance is ideal, as such results leave another class of primary trust beneficiaries (such as cestuis of marital trusts) without means of support from the trust, thereby defeating settlor intent.  Undeniably, it is a black-letter principle of trusts law in every jurisdiction that, in administering a trust, courts are bound to ascertain and effectuate the intent of the settlor as plainly discernible by reference to the text of the trust instrument.

    In response to this dilemma, at least nine jurisdictions have enacted emergency legislation specifically to combat this estate tax repeal impact on funding clauses expressly tied to federal estate tax exemptions, exclusions, or credits.  The remedy employed by eight of the nine states is both simple and effective:  When this issue arises, any applicable trust funding provisions are to be construed based upon the estate tax laws as they existed on December 31, 2009.  Nebraska's statute is representative.

    A will or trust of a decedent who dies after December 31, 2009, and before January 1, 2011, that contains a formula referring to the "unified credit", "estate tax exemption", "applicable exemption amount", "applicable credit amount", "applicable exclusion amount", "generation-skipping transfer tax exemption", "GST exemption", "marital deduction", "maximum marital deduction", or "unlimited marital deduction", or that measures a share of an estate or trust based on the amount that can pass free of federal estate tax or the amount that can pass free of federal generation-skipping transfer tax, or that is otherwise based on a similar provision of federal estate or generation-skipping transfer tax law, shall be deemed to refer to the federal estate and generation-skipping transfer tax laws as they applied with respect to estates of decedents dying on December 31, 2009.

    Neb. Rev. Stat. § 30-2342.02(1) (emphasis added).  Seven other jurisdictions have enacted laws with provisions identical or substantially similar to the Nebraska law's.  See, e.g., Md. Code Ann., Est. & Trusts § 11-110(a)(1); Utah Code Ann. § 75-3-917(1); Tenn. Code Ann. § 32-3-113(a)(1); Va. Code Ann. § 64.1-62.4(A); Wis. Stat. ' 854.30(1); S.D. Codified Laws § 10-40A-11; Ind. Code § 29-1-6-1(n).  Florida's iteration on this emergency fix statute simply empowers any trustee or beneficiary to petition the court so as to determine and effectuate the settlor's "probable intent" on the issue.  Fla. Stat. § 736.04114.  Presumably, in a state lacking a statutory fix to the estate tax repeal problem, the representative of an impacted estate would have to seek judicial modification of the trust terms so as to prevent funding consequences never anticipated by the testator/settlor, due to the temporary repeal of the federal estate tax; the easiest fix would be for a reviewing court to simply follow the example of the state legislatures that have already addressed this problem, concluding that such funding formulas are to be construed according to the estate tax laws in effect on December 31, 2009.

    Topics: legal research, Matt McDavitt, estates, The Lawletter Vol 34 No 11, sunset provision, federal estate tax, bypass trust

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