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IRS Allows Retroactive Trust Modification to Achieve the Donor’s Tax Objectives
Posted in Estate Planning

In a recent private letter ruling, 201652002, the IRS blessed the modification of a donor’s irrevocable trust in order to add a missing provision that was required for the trust to qualify under the IRS rules applicable to Grantor Retained Annuity Trusts (“GRATS”). The donor in question was able to take advantage of a statute in the donor’s state of residence allowing trusts to be modified to achieve the donor’s tax objectives, even with retroactive effect. The state court entered a judgment retroactively inserting the critical missing provision in each of the donor’s GRATS. The statute in question was taken from the Uniform Trust Code, which Kentucky has also adopted. Indiana has a more general statute permitting modifications and terminations of trust by courts.

IRS Allows Retroactive Trust Modification to Achieve the Donor’s Tax Objectives

The burning question was whether the IRS would go along with the retroactive modification of the donor’s GRATS. Without the missing provision, the GRATS would not have qualified for gift tax purposes. The IRS seized upon the intent language in the terms of the GRATS indicating the donor’s desire to create a “qualified interest” under the IRS GRAT rules. Based on this stated intent, and an admission that the attorney had simply overlooked inclusion of the necessary clause, the IRS quickly concluded that the retroactive modification would be recognized as valid from the date of the trusts’ inception, making them qualified as GRATS for gift tax purposes.

This favorable IRS ruling, honoring a retroactive modification to achieve the donor’s tax objectives, is certainly a welcome development. In states which have a similar statute, fixing errors in trusts that otherwise jeopardize the trust’s desired tax status should be a safe and effective approach, even when retroactive effect is needed to make an existing trust conform to the tax laws. This IRS ruling really also demonstrates the wisdom of including a statement of intent regarding the donor’s tax objectives for the trust. Such a statement can form the basis for a Court making technical changes in the document necessary to achieve the stated overall intent, with retroactive effect if necessary, and for the IRS then to accept the changes.

To learn more about John R. Cummins and his practice, please visit his profile.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...



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