Formula Clause Is Problematic For Heirs And Surviving Spouse

Our California readers have no doubt heard of estate taxes. They are taxes which must be paid on inheritance amounts of $1 million or more for an individual or $2 million or more for a couple. The estate tax has changed in recent years, but in one notable year it was totally gone. 2010 is the bonus year when there were no estate taxes in place. It was also the year that a woman died who owned half of an estate valued at $100 million.

A recent probate court decision in California regarding the woman’s estate serves as a good reminder to anyone with an estate eligible for estate taxes — keep your estate planning up to date.

The key issue that caused the estate dispute to end up in probate court was the formula clause. It stated that the assets that could pass tax free would be divided between the children, and the remainder would pass to the husband in a marital trust. This means that the entire estate is passed along tax free.

The formula clause would normally allow the exemption amount to change in the tax law, or be changed by Congress, without needing a new will or trust. That worked fine except in 2010.

The wife and mother was dying in 2010, which would have meant her entire half of the estate would go to her two children. The husband attempted an updated will which would have put the amounts for the two daughters at the previous rates of $5 million per person rather than splitting $50 million.

The two daughters fought the new estate plan on grounds of forgery and incapacity. The father and husband fought to keep the modifications as in the amended document.

In this particular case, the probate judge sided with the husband and father. In 2013 if the father dies, the estate tax will be 55 percent if his estate goes to his two daughters, rather than to a charity.

Source: msn money, “Dramatic estate tax battle delivers fresh lessons,” Amy Feldman. July 31, 2012

Our Los Angeles law firm represents individuals with a full range of estate planning needs including wills, trusts, gifts and estate tax issues such as those mentioned in this posting.