Senate Bill S8056

                                BILL NUMBER:S8056

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

PURPOSE OF BILL:
Under the Internal Revenue Code now in effect, the Federal estate tax
is repealed for decedents dying in 2010, only to be restored in 2011
at higher rates and with lower exemptions. Most estate attorneys
expected Congress to enact a new law prior to 2010 so as to prevent
the estate tax from expiring and did not anticipate that temporary
repeal would occur. There is still a possibility that Congress may
reinstate an estate tax for 2010 retroactively.

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repealed for transfers in 2010.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.

The purposes of the bill, accordingly, are:

1. To preserve the form in which most testators expected their estates
to be divided prior to the unexpected repeal of the Federal estate tax;

2. To assure that a surviving spouse will not be disinherited and left
to exercise a right of election under Article 5 of the Estates,
Powers and Trusts Law;

3. To shelter assets in a credit shelter disposition for the time
estate tax may be reinstated;

4. To prevent unwarranted amounts from
passing to grandchildren to the detriment of children.

SUMMARY OF PROVISIONS:
The bill, which applies to assets that are distributed upon the death
of a decedent through a will
or revocable trust, amends the Estates, Powers and Trusts Law to
provide that a formula in a will, or trust executed or created prior
to January 1, 2010 providing, in sum and substance, for a bequest of
an amount of property that can be sheltered from Federal estate tax
by reason of
credits against such tax, shall be construed under the Internal
Revenue Code of 1986 as in effect
for decedents dying on December 31, 2009, in the case of a decedent
who is survived by a spouse, and who dies during 2010 at a time when
the Federal estate tax is repealed. The Federal estate tax is not
deemed repealed if it is legally reinstated retroactively to the time
of the decedent's death. This legislation does not apply to
irrevocable trusts.

Similarly, if a will or revocable trust executed or created prior to
January 1, 2010 contains a bequest which in sum and substance refers
to the decedent's unused exemption from the federal generation
skipping transfer tax, then such bequest shall, be construed under
the Internal Revenue Code of 1986 in effect on December 31, 2009 with
respect to generation skipping transfers on such date. This applies
in the case of a decedent who dies during 2010 at a time when the
federal generation skipping transfer tax is not in effect. Again, the
federal generation skipping transfer tax is considered to be in
effect if legally reinstated retroactively to the date of decedent's
death.

This legislation also includes a provision exempting any will or trust
that already has provisions drafted by the testator determining what
should happen with formula clause provisions in the event that estate
or generation-skipping transfer tax is repealed.

Finally, this legislation provides that any affected beneficiary or
the executor or trustee may bring a proceeding within a year of the
decedent's date of death to determine whether the decedent intended
that that the formula clause be construed with respect to the law as
it existed on the decedent's date of death (rather than on December
31, 2009). In that regard, the legislation also provides that
extrinsic evidence may be admitted to establish the decedent's intent.

EXISTING LAW:
Existing Law following repeal of the Federal estate tax and generation
skipping transfer tax is unclear. It is conceivable that all of a
decedent's property may be held by a court to pass under a credit
shelter disposition to the detriment of a surviving spouse.

It is also possible that a decedent's children may be deprived of
property all of which is held to pass under a bequest of a decedent's
unused exemption from the Federal generation skipping transfer tax.

JUSTIFICATION:
Without this legislation, due to the repeal of federal estate and
generation skipping tax, when there is a formula clause in a will,
the intent of the testator cannot be carried out or determined
through a construction proceeding. The only remedy available is a
costly right of election proceeding. This legislation will therefore
avoid needless litigation to the benefit of beneficiaries of the
decedent and the court system as well.

LEGISLATIVE HISTORY:
New bill, 2010.

FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
There are no fiscal implications.

EFFECTIVE DATE:
This act shall take effect immediately, and shall be deemed to have
been in full force and effect on and after January 1, 2010.