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Given the unrelenting pace of change in the tax laws and in the economy, coupled with the ordinary changes in personal and family circumstances, any estate plan is bound to go out of date sooner or later. Sometimes, planning failures may be remedied post-mortem, sometimes not. Here’s an example with a favorable outcome:
Outdated and Nearly Out of Luck
Oskar Brecher died in 2016 with an estate of approximately $8 million. His last will and testament had been drafted in 1989. The federal estate tax had seen many important changes since then.
Brecher’s will left his surviving spouse the minimum amount needed to reduce federal estate taxes to zero, with the balance passing to a credit shelter trust, a routine approach to estate tax minimization at the time that his will was drafted. This was long before the major estate tax reforms of 2001, after which many states decoupled their death taxes from the federal template. Brecher died a resident of New York, which in 2016, had an estate tax exemption of $4,187,500, significantly lower than the $5,450,000 federal estate exempt amount.
Application of Brecher’s formula would result in a credit shelter trust of $5,450,000. A trust that large and not protected by the marital deduction would trigger a New York estate tax of $505,455, leaving $2,044,545 for the surviving spouse. The estate’s heirs petitioned to have Brecher’s will reformed, so as to reduce both federal and state death taxes to zero. In that case, the credit shelter trust would be only $4,187,500, and the surviving spouse would receive $3,812,500.
The trust beneficiaries did not oppose the reformation, and the Surrogate’s Court granted the petition. The Court said, “…reformation as a general rule is only sparingly allowed… however, the courts have been more liberal in their regard to petitions seeking reformation when that relief is needed to avert tax problems caused by a defective attempt to draft a will provision in accordance with the then tax law or instead caused by a change in law, subsequent to execution of the will, that renders a tax-driven will provision counterproductive. The central question in such a case is whether the clear wording of the subject instrument subverts rather than serves the testator’s intent.”
Moral of the story?
This estate had a sympathetic judge. The better course is to have a professional review of your estate planning documents after major tax law changes. Relying upon a 37-year-old will is expecting too much from an initial estate planning consultation.
Do you have questions concerning wealth management? If so, send them over to Adam Cox, JD, MBA, and he’d be happy to help.
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