Patching the Estate Tax

Last night I was just about ready to turn Larry King off when I heard him ask Bill Gates Sr. his opinion of the federal estate tax.  As you may know, Bill Sr. has been campaigning to keep the federal estate tax and his son supports his efforts.  As Bill Sr. sees it, the estate tax provides a substantial revenue stream from those with the greatest capacity to pay.

As Congress considers what to do about the federal estate tax the BBA is about to file a bill in the state legislature that would “patch” the federal estate tax and generation skipping transfer tax (“GST” taxes) for one year – providing us with the same exclusions that we had in 2009.

Here’s why we need the “patch.” Today the federal estate tax is zero, the result of legislation passed by Congress in 2001. That being said, virtually every estate planner expected that Congress would enact some form of federal estate tax before its 2010 sunset. 

As 2010 approached, many lawyers in Massachusetts predicted that Congress would at the very least “patch” the transfer tax laws so that we’d have the same exclusions and tax rate we had in 2009.  The thought was that this “patch” or temporary solution would be in place until Congress decided what to do for the long term.  That didn’t happen, and this has led to complications in estate planning, as well as questions about whether or not estate plans will work as they were intended to work. 

Congress’s failure to act in this regard creates havoc with an unknown number of estates of Massachusetts residents whose estate planning was done on the presumption that there would be some sort of federal estate tax system in effect in 2010.  This could also lead to failed bequests or potential litigation.

The BBA’s proposes to address this problem by filing retroactive legislation that would:

  • provide a default but rebuttable presumption for tax formula clauses tied to the federal estate and GST taxes;
  • reduce the burden on the probate courts of hearing construction cases related to tax formulas and other provisions in wills and trusts where there is no ambiguity on the face of the document;    
  • relieve smaller estates from the expense and delay of asking a probate court to construe such formula tax clauses in each case;
  • in cases where the default presumption is not the intent of the testator or grantor, it will allow the probate courts to consider extrinsic evidence to determine grantor or testator intent even where the instrument is ambiguous; and,
  • exonerate any executor or trustee who makes funding or distribution decisions based upon the 2010 suspension.

It appears that Congress is not able to reach a consensus on what to do with this quirk in the law so it is even more imperative that Massachusetts act and act quickly.  The bill is expected to be filed this week.  Thanks to Chairman Eugene O’Flaherty for recognizing the importance of this issue and for taking the important step to do something in Massachusetts while the debate is still going on in DC.  Let’s hope we can get this important piece through the legislative process soon.

– Kathleen M. Joyce

Government Relations Director

Boston Bar Association

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