April 23, 2010 – The State Legislature acted in the final hours of its 2009-10 regular session to minimize the potential adverse estate planning outcomes associated with the one-year repeal of the federal estate tax for deaths occurring in calendar year 2010. Both houses approved SB 670, which addresses administration of affected wills and trusts that were created in the expectation that the federal estate tax would continue in 2010.

Bill moves quickly through process

The bill was introduced on April 7, 2010 by Senator Lena Taylor and was co-sponsored by Rep. Robert Turner, with strong support and assistance from the State Bar’s Real Property, Probate and Trust Law (RPPT) and Elder Law Sections. It made an unusually rapid transit through the legislative gauntlet. “We had a very small, almost impossibly small, window of opportunity to get legislative action,” notes RPPT Section Board member Atty. Mark Shiller, who helped develop and build support for the bill. “The leadership of Sen. Taylor and Rep. Turner was crucial for gaining timely enactment of SB 670 and for generating the bi-partisan support necessary for the bill’s prompt consideration and passage.”

Shiller also praised State Bar staff for helping build legislative awareness of the issue and support for the bill’s passage. “The Wisconsin Legislature had a lot of complex and controversial business on its calendar in the final weeks of the session, which made it very difficult to get legislative attention on an important, but certainly technical, estate planning issue. Without the involvement and follow through of our Government Relations team, we would not have been able to get the bill drafted and calendared in both houses – let alone have the bill up for a vote before the end of the compressed legislative session. They did a great job with a tough challenge.”

Problem rooted in federal reforms

The one-year repeal was created as part of the federal tax cuts enacted in 2001. When those tax cuts expire for deaths in 2011 and thereafter, the estate tax will be back on the books with a $1 million per estate exemption and a top rate of 55% (compared to the $3.5 million exemption and 45% top rate in effect for deaths in 2009). While the practical problems associated with this sequence of events are obvious, given the gridlock in Washington, Congress has been unable to come up with a solution. The resulting uncertainty poses major estate planning challenges for both attorneys and their clients nationwide.

While a one-year reprieve from federal estate taxation would appear to benefit affected beneficiaries of individuals who die in 2010, Shiller explains that the unsettled nature of the federal law created a “significant potential for uncertainty and ambiguity in the administration of wills and trusts which did not contemplate the potential absence of the estate tax. This is especially troublesome given that an estate tax in some form or another has been relevant to decedents’ estates and trusts since 1916 – a total of 93 years!”

In certain circumstances, the consequences could include the unintended disinheritance of spouses, children and charities with resulting protracted litigation among family members.

Bill clarifies federal tax references

Under the bill, if the will or trust of an individual who dies in calendar year 2010 includes a formula that disposes of certain of the decedents property by reference to the federal estate tax, the federal generation – skipping tax, or both, the will or trust will be administered as if the provisions of the federal taxes were in force just as they were on Dec. 31, 2009.

The bill does, however, provide an exception to that treatment by directing administration of certain wills and trusts as if the applicable exclusion amount for decedents’ estates and the federal generation − skipping transfer tax exemption were unlimited, if all of the following circumstances apply:

The bill also stipulates that a personal representative of the decedent’s estate, trustee, or beneficiary of the decedent’s trust or will, or surviving spouse may petition the circuit court to allow the formula for distributing the decedent’s property to be applied in a manner different from that described above. The bill allows the court to consider the overall dispositive plan of the decedent, the tax implications of an alternative disposition, and the decedent’s intentions in establishing a formula provision, and other factors when determining how to respond to that petition.

Shiller notes that other state legislatures are also considering or have enacted legislation to address the problem. “Fifteen other states have remedial legislation in process or completed, many of them adopting the approach of the State of Virginia. Their approach was essentially to administer wills and trusts as if the 2009 estate tax law continued to apply to transfers in 2010.  The other main approach is the Florida approach, which required Court involvement in almost all cases”

The Wisconsin statute incorporates aspects of both the Virginia and Florida approaches, but adds the unique assumption of an unlimited applicable exclusion and generation-skipping exemption amounts in more traditional family situations. Shiller reports that the Wisconsin “balancing of these approaches was settled on as the most likely way to achieve results consistent with a testator or settlor’s intent,” but that the RPPT and Elder Law Sections supported the bill’s circuit court petition provision based on the fact that the unusual nature of the problem would have made it impossible to come up with a statute that would capture the testator or settlor intent in each case.

Members of the RPPT and Elder Law Sections worked with other interested parties, including the Wisconsin Bankers Association, to develop a legislative proposal within that broad framework.

A segment on the estate tax issue will be included in the 23rd Annual Law and the Elderly  CLE program on May 14.

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