Bill S5519-2011

Modifies certain formulas construed to refer to the federal estate and generation-skipping transfer tax on estates of decedents dying during 2010

Modifies certain formulas construed to refer to the federal estate and generation-skipping transfer tax on estates of decedents dying during 2010.

Details

Actions

  • Jun 16, 2011: SUBSTITUTED BY A7729
  • Jun 14, 2011: ADVANCED TO THIRD READING
  • Jun 13, 2011: 2ND REPORT CAL.
  • Jun 7, 2011: 1ST REPORT CAL.1084
  • May 27, 2011: REFERRED TO JUDICIARY

Meetings

Votes

VOTE: COMMITTEE VOTE: - Judiciary - Jun 7, 2011
Ayes (22): Bonacic, DeFrancisco, Flanagan, Fuschillo, Lanza, LaValle, Little, Nozzolio, O'Mara, Ranzenhofer, Saland, Zeldin, Hassell-Thompson, Breslin, Dilan, Espaillat, Gianaris, Krueger, Perkins, Serrano, Squadron, Stavisky
Ayes W/R (1): Adams

Memo

BILL NUMBER:S5519

TITLE OF BILL: An act to amend the estates, powers and trusts law, in relation to certain formula clauses to be construed to refer to the federal estate and generation-skipping transfer tax laws applicable to estates of decedents dying after December 31, 2009 and before January 1, 2011

This is one in a series of measures being introduced at the request of the Chief Administrative Judge upon the recommendation of her Surrogate's Court Advisory Committee.

This measure would amend section 2-1.13 of the Estates, Powers and Trusts Law ("EPTL"), which was added in 2010 in response to the repeal of the Federal estate tax for decedents dying in 2010 and the repeal of the generation-skipping transfer ("GST") tax in 2010. L. 2010, c. 349. In the view of our Advisory Committee, chapter 349 needs clarification in light of Federal election options.

According to the bill summary accompanying the 2010 enactment:

"Many wills, trusts and beneficiary forms prepared prior to 2010 were based on formula dispositions in the case of married testators. The aim was typically to leave as much as possible on the first spouse's death to a trust or to individuals other than the surviving spouse (typically issue of the decedent) without causing estate tax on the first spouse's death. This was commonly referred to as a "credit shelter bequest", since the amount involved ($3.5 million for decedent dying in 2009) would be sheltered from estate tax on the first death by a "unified credit" allowed under the Internal Revenue Code. The credit shelter bequest is not subject to estate tax at the surviving spouse's death. "The credit shelter bequest is usually phrased in terms of the maximum amount that can pass free of Federal estate tax on the first death, or in terms of like effect. The same results were obtained with formulas leaving a spouse outright or in a form qualifying for a marital deduction against the Federal estate tax, the minimum amount necessary to avoid imposition of an estate tax on the first spouse's death. With repeal of the estate tax, these formula clauses could be interpreted to leave the entire estate in a credit shelter disposition and nothing to the spouse or in a form qualifying for a marital deduction. This conclusion is reached since the entire estate and not just the part formerly sheltered by statutory credits can now pass under a credit shelter disposition without there being any estate tax.

The Federal generation-skipping transfer tax is also temporarily repealed for transfers in 2010. Many wills and testamentary instruments also left to grandchildren (or to trusts that would eventually pass to grandchildren) maximum amounts allowable without imposition of a Federal generation skipping transfer tax. With

repeal, this amount is now unlimited, and may pass to grandchildren to the detriment of the decedent's children."

Thus, in order to prevent unintended consequences of estate and GST tax repeal in the form of distorted formula dispositions, the EPTL was modified to construe certain formula bequests or other dispositions of property as if they were made pursuant to the provisions of the Internal Revenue Code of 1986, as amended, as those provisions were in effect on December 31, 2009.

The bill summary also indicated that (at the time the summary was prepared) there was still a possibility that Congress might reinstate an estate tax or a GST tax for 2010 retroactively. As a result, the EPTL was modified to contemplate a retroactive estate or GST tax by providing that the statutory rules of construction would not apply if the Federal estate tax "becomes applicable" before January 1, 2011.

As noted, our Advisory Committee believes that the 2010 legislation should be clarified. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act:), retroactively reinstates the Federal estate tax, with a $5,000,000 estate tax exemption amount and 35% estate tax rate for 2010. The 2010 Act also includes an option to elect out of estate tax treatment and be subject to a carry-over basis regime. The GST tax is also retroactively reinstated, with a $5,000,000 exemption amount and 0% tax rate for 2010.

Pursuant to EPTL section 2-1.13(a)(4), the statutory rules of construction will not apply if the Federal estate tax or GST tax "becomes applicable" before January 1, 2011. Accordingly, if an estate is subject to estate tax under the 2010 Act, the statutory rules of construction will not apply, and formulaic provisions will be keyed to the $5,000,000 exemption amount However, the result is unclear if an election is made not to have the federal estate tax apply. In such a case, the estate tax would not "be applicable" to the particular estate at hand.

If the estate tax must be applicable to the case at hand in order for the statutory construction rules not to apply, there may be an anomalous result if carry-over basis treatment is elected: in the estate tax default treatment scenario, a $5,000,000 exemption would apply in the interpretation of formula clauses. However, if carry-over basis treatment is chosen and the statutory construction rules are applicable, formula clauses may be interpreted with a $3,500,000 exemption (because the EPTL refers to Federal law as of December 31, 2009). This election option could present a very difficult dilemma for a fiduciary, typically subject to duties of impartiality, if the fiduciary's election might determine a funding amount.

The modifications to the EPTL enacted in 2010 were drafted to anticipate a possible retroactive estate/GST tax; however, the issue of an election about whether to have the estate tax apply was not

addressed. Our Advisory Committee believes that a modification to the EPTL is necessary in order to effect consistency in the interpretation of formula clauses (whether an estate is subject to an estate tax or a modified carry-over basis regime), and to clarify that formula clauses will be interpreted with reference to a $5,000,000 federal estate and GST tax exemption amount.

We believe that the statute should be clarified regarding its beneficiary designations. EPTL 2-1.13(a)(1) and (2) both provide:

"If by reason of the death of a decedent property passes or is acquired under a beneficiary designation, in the case of a will or trust of a decedent...that contains a bequest or other disposition based upon the amount of property that can be sheltered from...tax..." (Italics added)

We believe the addition of the phrase "in the case of" leads to ambiguity as to whether the statute applies to beneficiary designations generally, or only those designations that are payable to an estate or trust. The ambiguity regarding the statute's application to beneficiary designations is compounded because the reference to "beneficiary designation" does not consistently appear in the statute with each reference to a "will or trust". Accordingly, we recommend that the phrase "in the case of" be deleted from the statute and that the reference to "beneficiary designation" appear consistently with each reference to a will or trust. These changes are necessary to clarify that the statute applies generally to beneficiary designations.

We recommend clarification of the statute regarding bequests and other dispositions that refer to the GST tax exemption. In light of the 2010 Act, we believe that language in EPTL section 2-1.13(a)(2) regarding direct skips to natural persons should be removed. As a result of the clarification provided by the 2010 Act regarding the GST tax regime, the EPTL provisions should reach all GST type transfers. The reference to direct skips to natural persons is therefore unnecessary and confusing and should be removed.

This measure also would extend the time for bringing a judicial proceeding. The EPTL currently allows a judicial proceeding to be brought within 12 months following the death of the testator or grantor. Since Federal law was not clarified until December 2010, it is urged that the time for bringing a proceeding be extended until the end of the later to expire of (1) 24 months after death and (2) six months from the date of enactment of this measure (i.e., the date on which the Governor signs it into law). Indeed, with a 12 month time-frame, the time to bring a proceeding may have already expired with regard to decedents who died early in 2010. We also recommend that the court have discretion to further extend the time for filing a proceeding (parallel to the discretion granted to the court pursuant to EPTL Section 2-1.11 "Renunciation of property interest").

Notably, other states, including Virginia, have introduced legislation to clarify the operation of state formulaic construction statutes, in light of the 2010 Act. The proposal introduced in Virginia on January 20, 2011 also seeks to effect consistency in the interpretation of formula clauses (whether an estate is subject to an estate tax or a modified carry-over basis regime), and to clarify that formula clauses will be interpreted with reference to a $5,000,000 federal estate and GST tax exemption amount. The Virginia bill also includes a provision that will extend the time for bringing a judicial proceeding, beyond the original time frame of within 12 months of death.

This measure would take effect immediately and apply to wills and trusts of decedents dying after December 31, 2009 and before January 1, 2011.

LEGISLATIVE HISTORY: None. New proposal.


Text

STATE OF NEW YORK ________________________________________________________________________ 5519 2011-2012 Regular Sessions IN SENATE May 27, 2011 ___________
Introduced by Sen. BONACIC -- (at request of the Office of Court Admin- istration) -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary AN ACT to amend the estates, powers and trusts law, in relation to certain formula clauses to be construed to refer to the federal estate and generation-skipping transfer tax laws applicable to estates of decedents dying after December 31, 2009 and before January 1, 2011 THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Section 2-1.13 of the estates, powers and trusts law, as added by chapter 349 of the laws of 2010, is amended to read as follows: S 2-1.13 Certain formula clauses to be construed to refer to the federal estate and generation-skipping transfer tax laws applicable to estates of decedents dying after December thirty-first, two thousand nine and before January first, two thousand eleven (a)(1) If by reason of the death of a decedent property passes or is acquired under a beneficiary designation, [in the case of] a will or trust of a decedent who dies after December thirty-first, two thousand nine and before January first, two thousand eleven, that contains a bequest or other disposition based upon the amount of property that can be sheltered from federal estate tax by referring to the "unified cred- it", "estate tax exemption", "applicable exclusion amount", "applicable exemption amount", "applicable credit amount", "marital deduction", "maximum marital deduction", "unlimited marital deduction", "charitable deduction", "maximum charitable deduction" or similar words or phrases relating to the federal estate tax, or that measures a share of an estate or trust based on the amount that can pass free of federal estate taxes, or that is otherwise based on a similar provision of federal estate tax THEN SUCH BENEFICIARY DESIGNATION, WILL OR TRUST shall be deemed to refer to the federal estate tax law as applied with respect to decedents dying [on December thirty-first, two thousand nine] IN TWO THOUSAND TEN, REGARDLESS OF WHETHER AN ELECTION IS MADE NOT TO HAVE THE FEDERAL ESTATE TAX APPLY TO A PARTICULAR ESTATE.
(2) If by reason of the death of a decedent property passes or is acquired under a beneficiary designation, [in the case of] a will or trust of a decedent who dies after December thirty-first, two thousand nine and before January first, two thousand eleven, that contains a bequest or other disposition based upon the amount of property that can be sheltered from federal generation-skipping transfer tax by referring to the "generation-skipping transfer tax exemption", "GST exemption", "generation-skipping transfer tax", "GST tax" or similar words or phras- es that measures a share of an estate or trust based on the amount that can pass free of federal generation-skipping transfer taxes, or that is otherwise based on a similar provision of federal generation-skipping transfer tax law[; or if such bequest would have passed as a "direct skip" to a "natural person" within the meaning of such terms under chap- ter 13 of the Internal Revenue Code of 1986 if the decedent had died on December thirty-first, two thousand nine], then such BENEFICIARY DESIG- NATION, will or trust shall be deemed to refer to the federal genera- tion-skipping transfer tax law in effect [on December thirty-first, two thousand nine] IN TWO THOUSAND TEN, REGARDLESS OF WHETHER AN ELECTION IS MADE NOT TO HAVE THE FEDERAL ESTATE TAX APPLY TO A PARTICULAR ESTATE. (3) This paragraph shall not apply to a BENEFICIARY DESIGNATION, will or trust that[: (A) is executed or amended after December thirty-first, two thousand nine; or (B) Manifests] MANIFESTS an intent that a contrary rule shall apply [if the decedent dies on a date on which there is no then applicable federal estate tax or generation-skipping transfer tax]. [(4) The reference to January first, two thousand eleven in this para- graph shall, if a federal estate tax or generation-skipping transfer tax becomes applicable before that date, be construed to refer instead to the first date on which the federal estate tax or generation-skipping transfer tax becomes applicable.] (b) The executor, trustee or other interested person under a BENEFICI- ARY DESIGNATION, will or trust referred to in paragraph (a) of this section may bring a proceeding to determine whether the [decedent intended that the references described in such paragraph be construed with respect to the law as it existed on the decedent's date of death, without regard to the provisions of paragraph (a) of this section] BENE- FICIARY DESIGNATION, WILL OR TRUST MANIFESTS A CONTRARY INTENTION WITHIN THE MEANING OF SUBPARAGRAPH THREE OF PARAGRAPH (A) OF THIS SECTION. In any such proceeding, extrinsic evidence may be admitted to establish the decedent's intent. [Such proceeding] (C) ANY PROCEEDING DESCRIBED IN PARAGRAPH (B) OF THIS SECTION must be commenced [within twelve] BY THE DATE WHICH IS (1) TWENTY-FOUR months following the DATE OF death of the DECEDENT, testator or grantor OR (2) SIX MONTHS FOLLOWING THE DAY ON WHICH THE CHAPTER OF THE LAWS OF TWO THOUSAND ELEVEN WHICH AMENDED THIS PARAGRAPH BECAME A LAW, WHICHEVER DATE IS LATER, and not at any time thereafter. NOTWITHSTANDING THE FOREGOING, THE TIME TO COMMENCE SUCH A PROCEEDING MAY BE EXTENDED, IN THE DISCRETION OF THE COURT, ON A PETITION SHOWING REASONABLE CAUSE AND ON NOTICE TO SUCH PERSONS AND IN SUCH MANNER AS THE COURT MAY DIRECT. S 2. This act shall take effect immediately and shall be deemed to have been in full force and effect on and after January 1, 2010, and the provisions of this act shall apply to wills and trusts of decedents who die after December 31, 2009 and before January 1, 2011.

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