EPTL 2-1.13, Which Required that Certain Formula Clauses in Trusts and Wills Be Calculated as if Federal Estate Taxes Were Paid in 2010 (When the Tax Had Expired) , Did Not Apply to the Grantor Retained Annuity Trusts at Issue Here

The First Department determined Surrogate’s Court properly determined how to distribute two grantor retained annuity trusts (GRATs).  The grantor died in 2010. Because the federal estate had expired in 2010, executors were permitted to pay no estate tax that year and the executors so elected in this case. A clause in the GRATs provided that whatever fraction of the assets in the GRATs is “includable in the Grantor’s gross estate for Federal estate tax purposes” passes into the estate, and any remainder is distributed equally to the three children.   The court held that EPTL 2-1.13, which required that, in 2010, certain formula clauses in trusts and wills be calculated as if the federal estate tax had been paid, did not apply.  Therefore, all of the assets in the GRATs were to be distributed equally:

A review of the legislative history of EPTL 2-1.13(a)(1) reveals that its purposes were quite narrow and that it was primarily a legislative fix enacted to prevent the thwarting of the well-intentioned estate plans of those who, in good faith reliance on the existence of an estate tax in 2010, bequeathed significant portions of their estates to persons other than their spouses, so they could take full advantage of the spousal estate tax exemption. For people who died in 2010, the expiration of the estate tax not only nullified oft-utilized tax planning strategies, but threatened to leave their spouses with less money than they otherwise would have received, and with no concurrent benefit. The Legislature, by enacting EPTL 2-1.13(a)(1), saved these estate plans by permitting their creators to adopt the fiction that they paid an estate tax, even if they did not.

There is no evidence here that the GRATs at issue were created with the specific goal of taking advantage of spousal exemptions based on the federal estate tax, or were structured for similar purposes. Further, the Legislature did not contemplate that the repeal of the tax law would implicate the formula clause at issue here. The clause here references federal estate tax laws not to minimize tax liability, but to account for an uncertain value to include in the taxable estate upon death of the grantor, to be distributed in proportion to each of the beneficiaries’ taxable share of the estate … . Thus, contrary to petitioner’s assertions, the GRATs’ reference to the amount of trust property “includible in the Grantor’s gross estate for Federal estate tax purposes” is not analogous to the “amount that can pass free of federal estate taxes, or that is otherwise based on a similar provision of federal estate tax,” as EPTL 2-1.13(a)(1) recites.  Matter of Kirschner v Fisher, 2014 NY Slip Op 03626, 1st Dept 5-20-14