When changes in the law occur, it’s important to revisit your clients’ estates plan to make sure that those changes don’t adversely impact formula provisions in their wills. While a court may permit a will to be reformed to correct such adverse consequences, the wiser course is to avoid the necessity for court intervention.
Reformation as a general rule is only sparingly allowed. However, the courts have been more liberal in their regard for petitions seeking reformation when that relief is needed to avert tax problems caused by a defective attempt to draft a will provision in accordance with the then tax law, or instead caused by a change in law, subsequent to execution of the will, that renders a tax-driven will provision counterproductive.¹
Formula Clause in Will
In Matter of Brecher, the decedent died with an estate valued at approximately $8 million. The decedent’s will contained formula provisions designed to minimize estate taxes by dividing the estate between a credit shelter trust and a marital bequest to the surviving spouse. The marital formula provided, in essence, for an amount necessary to reduce the decedent’s federal estate tax to zero. The residuary was left in the credit shelter trust for the benefit of the decedent’s wife and descendants.
At the time the will was executed, New York State’s estate tax consisted of what was commonly referred to as a “sponge tax,” meaning that it was tied to the state death tax credit available as an offset against the federal estate tax. Under this tax system, if there was no federal estate tax liability, there would automatically be no New York State estate tax. Thus, at the time the will was drafted, it would have been pointless to structure the marital formula to provide for it to be funded in an amount necessary to reduce the decedent’s federal and state estate tax to zero.
Change in Law
By the time of the decedent’s death, the New York State estate tax law had changed to provide for its own estate tax exclusion, independent of the federal state death tax credit (which had also since been repealed) and smaller than the federal estate tax exclusion. As a result, the formula in the decedent’s will would result in significant New York State estate tax because it would require the funding of the credit shelter trust in an amount in excess of the New York State estate tax exclusion amount.
The court permitted the reformation of the decedent’s will to alter the marital formula so that it would now provide for an amount necessary to reduce the decedent’s federal and state estate tax to zero. The court found the reformation was consistent with the decedent’s intent to benefit his wife and descendants and to maximize tax savings.
- Matter of Brecher, 206-1971, New York Law Journal (Surr. Ct. NY County, Jan. 11, 2017).