Estate Tax Battle in California Shows the Dangers of Clauses

The Tweten family entered a world of confusion and frustration when they were faced with a $100 million estate battle during the year of no estate tax. In 2010, there was no estate tax, this being a gap year that was planned into the estate tax system for years. The Twetens had amassed a fortune and placed many of their assets in a trust to minimize estate taxes when they passed away. They also included a formula clause in this trust, which would divide the state so that the children could obtain the amount of assets in the federal estate tax exclusion.

The current formula clause for 2012 is set at $5 million per person. The rest of the money that was in the Twetens trust would go to the surviving spouse. Essentially, the formula clause would allow all the children to get the full amount of the exclusion tax-free, and preserve the majority of the estate. The amount that went to the surviving spouse would be tax-free, so the surviving Tweten would end up with a fortune that wasn’t zapped by estate taxes. This plan was set in stone by the couple who had been married for 58 years and was getting up in years as they both celebrated their 80th birthdays. The trust with the formula clause should have shielded this family from the estate taxes that can obliterate much of an estate. But it didn’t.

The Tweten’s problems arrived because of the 2010 estate tax gap. The formula clause relies on the federal estate tax exclusion, which changes from year to year. The split can vary based on the tax policy that is in effect when the owner of the fortune passes away. In 2008, for example, the tax exclusion was $2 million. Therefore, each of the Tweten children would have inherited $2 million out of the trust, and the rest of the massive estate would have gone to the surviving parent. Yet in 2010 there was no exclusion because there was no estate tax. Therefore, when Mrs. Tweten died that year, her whole estate was divided among the children under the formula clause, leaving her husband with nothing.

The issue sent the family to court, squabbling over whether or not Mr. Tweten should receive the bulk of the estate. While Mrs. Tweten was in hospice care, about to pass away, attorneys were working to create an amendment in the formula clause which would allow Mr. Tweten to inherit the money he had worked so hard to earn. An amendment was created 12 days after his wife’s death, but the family’s quarrels did not end there. Mr. Tweten’s two adult daughters wanted to money that they believed that had a right to through the clause, and took the issue to a probate court. They argued that they should have the right to the estate. Their lawyers proved that the amendment was forgery and invalid on the grounds of incapacity. Their father brought his attorney to fight for his case, saying that the amendment was fair and should be upheld.

In the end, the court threw out the amendment because it had not been notarized. This nightmarish probate scramble shows that clauses aren’t always reliable. Because the estate tax exemptions change from year-to-year, there is never a surefire way to know how things are going to turn out. Estate planning attorneys are trying to move away from the formulaic approach now in favor of more flexible wording. That way, then an issue like the 2010 estate tax gap year arises, people will be in a better position to handle the modifications necessary to bring a fair inheritance for everyone. Talk to a probate attorney today if you have questions about how a formulaic clause will affect your inheritance.