IRS Rules on Reformation of a Trust to Correct an Error

“A” created “Trust” and intended to provide “B” with lifetime annual income of a certain percent of the principal by using a Charitable Remainder Unitrust (CRUT). A’s attorney used the incorrect form, however, and create a net income with makeup charitable remainder unitrust, instead (NIMCRUT). Bank later replaced A’s attorney as the co-trustee and discovered Trust was a NIMCRUT. Bank and B filed a petition seeking authority to reform Trust to a CRUT. A’s attorney acknowledged that the creation of a NIMCRUT was a scrivener’s error.

The court approved the reformation based upon the mistake at its execution. However, the court conditioned its approval on the parties obtaining a favorable private letter from the IRS stating that the reformation would not disqualify Trust as a section 664 CRUT or constitute self-dealing under section 4941.

In PLR 201133004, the IRS ruled that the court’s reformation of Trust would not disqualify Trust’s tax qualified status under section 664 as long as Trust distributed all amounts owing to B from prior years within 120 days of the date of the letter. The IRS further concluded that the reformation of Trust did not constitute self-dealing under section 4941.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention and Brian Spring (Associate Editor, Wealth Strategies Journal) for posting on PLR 201133004.