Trust Reformation

In Private Letter Ruling 201442046 (Oct. 17, 2014), the Internal Revenue Service held that a reformation of a trust to correct scrivener’s errors triggered remainder interests to be completed gifts and consequently, a trust’s assets would not be included in a grantor’s gross estate upon his death.  Furthermore, the reformation would not cause any current or future beneficiaries to make a gift to any other trust beneficiaries.

Grantor and his wife met with an attorney to discuss estate planning for their four children.  The couple decided to use grantor retained annuity trusts (GRATs), including a 4-year term GRAT and a 15-year term GRAT.  To grantor established both GRATS by making gifts of stock to each GRAT.  Under the 4-year GRAT, the grantor would receive an annuity for 4-years, and the remaining assets would pass to a Children’s Trust.  The second GRAT was similar, but after the 15 years, the Children’s Trust would be the remainder beneficiary. 

The grantor subsequently hired an accountant to prepare Form 709 and report the date of transfers to the GRATs.  The accountant notified the grantor that the Children’s Trust contained language making the Trust revocable by the grantor, thereby defeating the grantor’s intent in creating the GRATs. 

The grantor retained a second attorney to reform the Trust under state law and filed a petition in state court to request reformation of the Trust to correct mistakes under scrivener’s errors.  The court approved the petition and ordered the reformation should be effective. 

See Dawn S. Markowitz, State Court Trust Reformation, Wealth Management, Oct. 22, 2014.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) and Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.