The repeal of the federal estate tax has left planners trying to provide band aids to help their clients navigate this ambiguous terrain.

Now states are trying to come to the rescue, introducing legislative patches to deal with the problems that the repeal of the estate tax created.

The real issue though is that many clients rely on estate tax guidelines to draft their wills instead of dealing with the emotional issues of deciding in black and white who gets how much.

Earlier this week Virginia took the lead passing an emergency bill with its House of Delegates, which its state Senate will enact immediately. The bill treats the will of anyone who dies this year as if the 2009 federal estate tax law still stands.

Other states, including Nebraska, Maryland, South Dakota, Tennessee and Washington are following suit. Florida and New York’s approach is different though: the bills in these states would require the executor of the will to go to court and try to figure out the intent of the person who wrote the will when it was drafted.

“What Florida is saying is that it is not comfortable making the decisions about what clients may have wanted,” said Carol Kroch, a vice president, managing director, and head of wealth and financial planning at Wilmington Trust Corp. [WL]

States are getting involved to avoid some messy problems the repeal of the estate tax could cause.

For example, if a client writes in their will that they want to give their children the maximum amount of their estate free of tax, the children may be left with the entire estate if the client dies this year, leaving the clients wife or husband with nothing, since the tax exemption amount is zero.

So with a $10 million estate, if the client died last year his children would receive $3.5 million (the maximum exemption amount) and his wife would receive $6.5 million. If he dies this year, the children would be left the entire $10 million since his entire estate is exempt.  

The biggest lesson from this estate tax mess, said Martin Shenkman, an estate tax lawyer, is for clients to have their wills revised and make sure their intent is stated clearly.

“There is so much upheaval in the world, with the estate tax and the financial crisis, that you should come back once a year for a review,” he said.

The challenge for many clients though is that they have a difficult time clearly explaining what they want to do with their estates. “It’s much easier to rely on estate taxes as the guiding principle on how you do your planning,” Shenkman said. “It’s practical, not emotional. One of the lessons both clients and advisors need to take with them is life is uncertain and tax law is uncertain and it’s important to clarify what the client wants done in the documents.”

But how do you explain to your children that you don’t want to leave them much of your estate?

“If I don’t like my kids it’s hard to write that in black and white so clients will use soft and fuzzy language to write their wills," Shenkman said. "But it’s better to have an air-tight document that says, ‘My objective of this provision is to primarily benefit my wife. Only to the extent of a tax benefit, I will give to my children.’ Clients should really spell out what they want on a personal level, not just make their decision based on what the tax law provides.”

Until the federal estate tax brouhaha is figured out, states are going to be left to decide whether to create a legislative patch, reverting estate tax law to 2009 rates, or go to court to guess what the client intended when they wrote their will. The other option is that clients avoid using formula clauses in their will that are open to interpretation and really say what they mean.

Estates are emotional things and no family is perfect. “The easy way out is not confronting the personal issues,” Shenkman said. “Many people use the estate tax as an easier way to make decisions than having to delve into tough personal decisions.”

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