The IRS has issued another private letter ruling granting retroactive tax effect to a judicial modification of a trust.
In PLR 201652002, the IRS granted retroactive effect to a court “reformation” under Uniform Trust Code § 416, which allows a court to “modify” a trust in order to carry out the settlor’s tax objectives. The trusts in question were expressly intended to be grantor retained annuity trusts, but failed to prohibit the trustee from issuing a note or other financial instrument in satisfaction of an annuity payment, which failure was a violation of Treas. Reg. § 25.2702-3(d)(6). The IRS concluded that the judicial reformation was to correct a “scrivener’s error,” and that as a result of the reformation, the grantor’s interest in the trust was a qualified interest as of the date the trusts were created. This was a generous result, because for the reasons explained in my article “Tax Effects of Retroactive Reformations and Modifications,” the taxpayer should have sought a reformation under UTC § 415 and not a trust modification under UTC § 416.