In PLRs 201723002 and 201723003, the Service ruled that a judicial reformation of an ILIT would result in death benefit of insurance being excluded from grantor’s estate. The PLRs state, in part, the following:
Grantor recently discovered that, notwithstanding her expressed intention and decision to create Trust in accordance with the Plan so that the trust property would not be includible in her gross estate, it is possible that the trust property might be included in her gross estate, due to a drafting error made byAttorney. In conflict with Grantor’s intent (as set forth in Paragraph B of Article I), Paragraph B of Article V erroneously provides that a child’s (or a child’s descendants’) share of Trust assets (at Grantor’s death) is to be determined in accordance with Grantor’s Will and Revocable Trust.
On Date 4, Grantor filed a petition in State Court to retroactively reform (to Date 3) Paragraph B of Article V. In her declaration to the court, Grantor represented that: (i) she directed Attorney to draft a trust instrument consistent with the Plan, (ii) she believed each of her gifts was a completed gift for federal gift tax purposes, and (iii) the proposed reformation reflects her true intentions in establishing Trust. In his declaration to the court, Attorney represented that the language of Paragraph B of Article V is the result of his scrivener’s error. He further represented that the reformation was necessary to correct the error to reflect Grantor’s true intentions in establishing a trust that would not be includible in her estate.
State Court granted the petition on Date 5. As reformed, Paragraph B of Article V provides that, following Grantor’s death, the trustee shall divide the trust estate into as many separate and equal shares as are required to provide one share for each then living child of Grantor and one share for the then living descendants, collectively, of any child who has died.
You have asked us to rule that:
(1) As a result of the retroactive reformation of Paragraph B of Article V, Grantor’s transfers to Trust will be completed gifts for gift tax purposes.
(2) As a result of the reformation, the assets of Trust will not be includible in Grantor’s gross estate at her death.
(3) For generation-skipping transfer tax purposes, in determining the inclusion ratio under § 2642 with respect to transfers of property made by Grantor to Trust, the value of the property will be determined under § 2642(b) as of the date of each gift to Trust.
The Service granted the ruling to the taxpayer.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.