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    The Lawletter Blog

    TAX: Postmortem Reformation of a Trust in Order to Preserve the Settlor's Intended Tax Objectives

    Posted by Gale Burns on Fri, Jun 29, 2012 @ 12:06 PM

    The Lawletter Vol 37 No 2

    Brad Pettit, Senior Attorney, National Legal Research Group

    The Internal Revenue Code has long recognized the validity of a postmortem judicial reformation of a trust or will in order to carry out the settlor's intent for his or her estate to realize estate tax savings with respect to a gift in trust to a charity.  See 26 U.S.C. § 2055(e)(3) (providing that a charitable estate tax "deduction" shall be allowed in respect of any "qualified reformation" of a "governing instrument").  However, the Code does not appear to have any other provisions that expressly recognize the validity of a reformation of a trust or will in order to carry out other types of intended tax minimization strategies.

    A recent Private Letter Ruling by the Internal Revenue Service ("IRS") indicates that the IRS will recognize and give effect to a postmortem reformation of a trust for the purpose of making sure that a settlor's intent to keep all or part of the trust assets out of his or her surviving spouse's taxable estate is carried out.  In Private Letter Ruling ("P.L.R.") 2012-14-022 (Apr. 6, 2012), the IRS recognized and gave federal estate tax effect to a state court's decision to allow the trustee of a decedent's testamentary trust to modify or reform the trust so as to remove language therefrom that originally gave the testator/settlor's surviving wife the power, in her will, to direct the trustee of her deceased husband's trust to distribute trust assets to her estate upon her death.  By recognizing and giving effect to the state court's decision to allow a postmortem modification or reformation of the predeceased husband's will, the IRS, in effect, assured the surviving wife's estate considerable federal estate tax savings.  If the IRS had refused to recognize and give effect to the state court's ruling, the surviving wife's estate would have been required to include the assets of the predeceased husband's defectively drafted trust in her gross estate.  Under 26 U.S.C. § 2041, a decedent's taxable gross estate normally must include the value of any property over which the decedent held a general power to appoint to himself or herself or to the estate.

    P.L.R. 2012-14-022 represents an acknowledgment by the IRS that an error by an attorney in drafting a client's will and/or testamentary trust can be corrected by a state court after the client's death so as to make sure that the deceased testator's and/or trust settlor's intended estate-planning objectives are carried out.  As a cautionary note, a Private Letter Ruling that is issued by the IRS may not be used or cited as precedent.  26 U.S.C. § 6110(k)(3); Amergen Energy Co. ex rel. Exelon Generation Co. v. United States, 94 Fed. Cl. 413 (2010) (citing, inter alia, ABC Rentals of San Antonio, Inc. v. Comm'r, 142 F.3d 1200, 1207 n.5 (10th Cir. 1998) (while Private Letter Rulings are not binding authority, they may be cited as evidence of administrative interpretation)).  For additional comment on and discussion of P.L.R. 2012-14-022, see Reformation of Trust Prevents Trust from Being Included in Surviving Spouse's Estate When She Was Originally Given Power to Appoint the Property to Her Estate at Her Death, 53 Tax Mgmt. Mem. (BNA Bloomberg) 204 (May 21, 2012), and 58 Fed. Taxes Wkly. Alert (RIA) art. 25 (Apr. 12, 2012).

    Topics: legal research, Brad Pettit, tax, The Lawletter Vol 37 No 2, reformation of trust, tax minimization strategies, Private Letter Ruling allowed postmortem reformati

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