Wisconsin Cures Formula Clause Woes

A few days ago, Governor Doyle of Wisconsin signed 2009 Wisconsin Act 341. This new law creates section 854.30 of the Wisconsin Statutes. Click here to read the act: http://www.legis.state.wi.us/2009/data/acts/09Act341.pdf.

Due to the current one-year repeal of the federal estate tax, if a person dies in 2010, the decedent's will or trust may not make sense. Many provisions in a person's will or revocable trust are interpreted by reference to the Internal Revenue Code, specifically, the estate tax, generation-skipping transfer tax and gift tax provisions. For couple's with larger estates, many times, the distribution of assets upon the first spouse's death is determined by the application of a formula clause. Typically, the formula clause refers to existing federal estate tax exemption amounts and Internal Revenue Code provisions. Well, for 2010, those provisions of tax law do not exist due to the estate tax repeal for 2010. Consequently, the estate plan may not work as designed.

New section 854.30 is Wisconsin's version of a cure for this ailment. Basically, the new section provides that if a person dies in 2010, and the person's will or trust includes a formula clause, then any reference to the estate tax laws in the decedent's will or trust is a reference to the laws in effect on December 31, 2009. Also, if certain factual circumstances apply, the federal applicable exclusion amount under I.R.C. § 2010(c) will be unlimited rather than equal to the 2009 figure of $3.5 million.

Wisconsin is not the first state to pass this type of legislation. Several other states have passed similar legislation in recent months to save attorneys from having to petition the court for reformation assistance on this issue. Wisconsin's new law also provides that a personal representative or trustee may also petition the court for a different construction and interpretation in the event that is logical under an estate's particular facts. Even with this new legislation, it is critical to obtain skilled legal advice in the event a client dies with a larger estate during 2010.