Sometimes the drafter of a document makes a mistake that can lead to costly estate or gift taxes. In a recent private letter ruling (PLR) 201544005, the Internal Revenue Service (“IRS”) allowed a state court reformation of a trust to fix certain drafting errors which could have resulted in adverse estate tax consequences.
In PLR 201544005, the Grantors created a trust for the benefit of their minor children. The trust provided that distributions from the trust were to be made for the benefit of their children primarily for their education, health, and personal development until the age of 25. After the eldest child reached age 25 the trust was subdivided into 2 sub-trusts. Language in the trust provided that the trust was irrevocable but in another article the language provided that the Grantors had the power to amend the trust to increase the benefits distributed to their children and to name additional trustees.
The Grantors transferred property to the trust and filed a Form 709-United States Gift (and Generation-Skipping Transfer) Tax return, reporting the gifts to the trust. The Grantors were trustees of the trust but, while acting as trustees, made no distributions to their children.
The Grantors realized that the language in the trust stating that they could amend the trust, together with other trustee distributions standards for their children, did NOT reflect their intent to make an irrevocable completed gift. If the gift was a completed gift and the trust was irrevocable, then the gift would not be included in their estate for estate tax purposes. If the Grantors had NOT made a completed gift, then the gifts WOULD be included in their estate for estate tax purposes. The Grantors’ intent was not reflected in the trust.
The Grantors filed pleadings in state court to reform the trust to delete the unfavorable provisions and the drafting attorney filed an affidavit stating that the unfavorable provisions were a “scrivener’s error” and that the trust should be reformed. They were successful in state court.
The Grantors then applied to the IRS for this PLR and asked whether the reformation would be honored and the gifts would be treated as a completed gift to the trust and that the assets would not be included in wife’s estate for estate tax purposes.
The IRS discussed Commissioner v. Estate of Bosch in which the United States Supreme Court stated that the IRS is NOT bound by any decision in the state court unless the decision is rendered by the highest court in the state. If the decision is rendered by a state lower court, then the IRS must apply what it finds to be state law after giving regard to the state trial court’s determination. After reviewing relevant state case law, the IRS determined that the reformation by the state court was consistent with state law as applied by the highest court of the State. The IRS also determined that the assets would not be included in the wife’s estate for estate tax purposes.
ADVICE: This reformation can be a way to “fix” errors in a trust. The IRS, however, is not always amenable to reformation. The taxpayers won because, with extrinsic evidence admitted as allowed under state law, it was clear as to their intent. Further, the drafting attorney filed an affidavit admitting to scrivener’s errors. Also remember that PLRs are ONLY binding on the taxpayer requesting the PLR. You can not rely on another taxpayer’s PLR for your own case, although the PLR will give you an idea as to the IRS opinion on a specific matter.
New Word of the Week: sc… I recently reviewed a pleading that included the initials, sc. Having been out of law school for more years than I care to admit I had to look up those initials. The initials “sc” stand for scilicet. Scilicet is a Latin term meaning “that you may know”. In a pleading “sc” is used to introduce a more particular statement of a matter previously mentioned in general terms. For example, Florida Statutes, Chapter 739 (sc. Florida Uniform Disclaimer of Property Interests Act).
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