You Had Better Check Your Estate Planning Formulas
Yesterday, I met with a spry 90 year old widow who believed that her Will gave $1 million to her grandchildren. I determined that her will actually gives $3.5 million to her grandchildren. If she had died with this Will, her grandchildren would have received significantly more than her two sons.
The reason for my client’s misunderstanding was her Will’s use of a formula. The bequest to the grandchildren was an amount equal to her “available GST exemption”. When her Will was drafted, her "available GST exemption" was $1 million. However, due to law changes that have occurred over the last several years, her GST exemption increased to $3.5 million.
It is very common for Wills to contain formulas that are based upon tax laws. This allows your Will to take advantage of changing exemption amounts without having to redraft your Will every time there is a law change. However, when a Will uses a formula, your attorney should explain the effect of the formula. I suspect that my client’s former attorney did explain the formula. Nevertheless, all she remembered was that the formula resulted in a bequest of $1 million.
There are a lot of formulas that are going to be distorted if Congress does not amend the estate tax laws within the next three weeks. As the law is currently written, there will be no federal estate taxes in the calendar year 2010. Because a lot of formulas are written based upon laws that simply will not exist for people dying in 2010, numerous formulas will not make any sense. Other formulas will be open for debate. As an example, I believe that my client’s Will will result in a bequest of $0 to her grandchildren, because it refers to an exemption amount that will simply not exist in 2010. The grandchildren might challenge that result as not representing their grandmother’s intent. I predict that there will be multiple lawsuits regarding these types of results if Congress does not change the law for 2010.
Tax-driven formula provisions in Wills are widely used and serve a useful purpose. Make sure you know what your formula means, and recalculate the results of your formula from time to time. If Congress does not change the tax laws in the next three weeks, everybody needs to check their formulas.
