Governor McDonnell has signed into law emergency legislation that addresses uncertainty about the meaning of estate and generation-skipping transfer tax terms in the estate plans of persons who died in 2010. The legislation is effective immediately and is retroactive to January 1, 2010.
On March 26, 2011, Governor McDonnell signed into law Senate Bill 1423, which addresses the uncertainty created in the estate plans of persons dying in 2010, as a result of recent changes to the federal estate and generation-skipping transfer tax laws in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act).
The new law makes changes Virginia Code section §64.1-62.4 to provide, as a default rule, that a provision of a will, trust, or other instrument of a person dying in 2010 that is based on the federal estate and generation-skipping transfer (GST) tax laws will be deemed to refer to the law applicable in 2010 under the 2010 Tax Act, regardless of whether the decedent’s personal representative or other fiduciary makes the election provided under the 2010 Act out of the federal estate tax and into an income tax regime. The law also provides for judicial or private relief in the event the default rule does not carry out the decedent’s intent. Virginia is the first state to enact legislation in response to these issues created by the 2010 Tax Act.
Estate planning documents commonly divide assets among beneficiaries (or trusts for their benefit) by the use of formulas that rely on federal estate and generation-skipping transfer tax provisions such as the unified credit, estate tax exemption, applicable exemption amount, GST exemption, and marital deduction.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act) the federal estate and generation-skipping transfer taxes were made inapplicable and effectively repealed for estates of 2010 decedents. As a consequence, the meaning of federal tax terms in the estate planning documents of many 2010 decedents became uncertain. Virginia responded to the uncertainty by Virginia Code §64.1-62.4, which established a default rule that tax terms in the estate plans of 2010 decedents would be interpreted with reference to 2009 federal estate and GST law, with the availability of judicial relief if the default rule did not carry out the decedent’s intent.
On December 17, 2010, President Obama signed the 2010 Tax Act into law. The 2010 Tax Act includes two unexpected provisions: (1) the federal estate tax was retroactively imposed for 2010 decedents, but with higher $5 million estate and GST exemptions (exemptions no higher than $3.5 million were generally expected); and (2) the 2010 Tax Act provides the executor of a 2010 estate an election to opt out of the federal estate tax and into an income tax regime called “modified carryover basis.” A more complete discussion of the 2010 Tax Act can be found in the McGuireWoods White Paper, available here.
The 2010 Tax Act renewed the uncertainty about formula clauses in the estate plans of 2010 Virginia decedents, and in particular: (1) whether the $5 million estate and GST exemptions apply to formula clauses; and (2) whether the exemptions continue to apply where the executor opts out of the federal estate tax and into modified carryover basis.
The Virginia Solution
The changes to Virginia Code §64.1-62.4 attempt to resolve these concerns for 2010 decedents by the following provisions:
- If the document is otherwise silent, the statute provides a default rule of construction that applies the 2010 Tax Act $5 million estate and GST exemptions for the purpose of determining who receives assets. Va. Code §64.1-62.4(A).
- The statute clarifies that the 2010 Tax Act estate and GST exemptions continue to apply for the purpose of determining who receives assets even where the executor opts out of the federal estate tax. Va. Code §64.1-62.4(A).
- A personal representative, trustee, other fiduciary, or any beneficiary may seek judicial relief if the default rule does not carry out the testator’s intent. So that the judicial relief provision operates properly, suits must be brought before January 1, 2012, extrinsic evidence is allowed, and the petitioner has the burden of proof by clear and convincing evidence. Va. Code §64.1-62.4(B).
- Consistent with the Virginia Uniform Trust Code, the statute also provides that all interested persons may enter into an agreement to depart from the default rule if the default rule does not carry out the testator’s intent, and permits the parties to seek court approval of the agreement. Va. Code §64.1-62.4(C).
These changes are intended to protect the intent of most testators, reduce litigation, and reduce risks for fiduciaries by replacing chaos with certainty, and also allowing remedies if the default rule does not fit the situation.
Senate Bill 1423 was enacted as emergency legislation that is effective immediately, and is applied retroactively back to January 1, 2010.
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