Unlimited Estate Tax Exclusion Sparks Estate Planning Drama

A family's dramatic legal battle may offer New Yorkers a valuable lesson about how to plan ahead wisely. The estate planning drama surrounds the unexpected one-year disappearance of the federal estate tax during the year 2010.

The story starts with a trust set up by the founder of Magnolia Audio Video and his wife in order to reduce their estate taxes. The trust included a formula clause, which often splits up the estate so that each child gets the equivalent of the federal estate tax exclusion, which is currently $5 million per person. Any remaining assets go into a marital trust, which then passes to the surviving spouse, free of taxes. This estate planning strategy ensures that the full amount of the exclusion goes to each heir tax-free.

However, the federal estate tax exclusion varies from year to year. In 2008, for example, it was only $2 million, while in 2010, it was unlimited.

When the wife died in 2010, the formula clause meant that the entire estate would pass to the children rather than several million dollars, as the parties expected, given the typical federal estate tax exclusion laws. The wife, however, saw the issue coming and executed an amendment to the trust just 12 days prior to her death.

However, the wife's efforts did not stop a family dispute from breaking out. The couple's adult daughters challenged the validity of the trust amendment, claiming that it was either a forgery or that their mother did not have the capacity to make a valid amendment. In contrast, the husband, who was, incidentally, the person who created the wealth in the first place, petitioned the court to recognize the trust as amended.

Ultimately, the court rejected the trust amendments because they were not properly notarized as required by the trust document, but still sided with the husband based on the intent of the wife when she originally created the trust.

This family drama illustrates the fact that, given the fluctuations in the federal estate tax exclusion over the years, people should review their estate plans regularly in order to ensure that their plans still match with their true intentions with respect to their assets.

Source: Reuters, "Dramatic estate tax battle delivers fresh lessons," Amy Feldman, July 31, 2012

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