In this matter, the draftsman failed to include language prohibiting the trustee from issuing a note, other debt instrument, option or other similar financial arrangement in satisfaction of the annuity obligation as required by § 25.2702-3(d)(6) of the Gift Tax Regulations. In other words, the governing language failed to make the retained interest a “qualified interest” under IRC § 2702(b)(1). After the state court issued an order reforming the trusts to include the language as required by the tax regulations, the grantor sought confirmation that their interest in each trust was a qualified one for federal gift tax purposes.On balance, the IRS concluded that the trust instruments could be amended so as to qualify them as valid GRATs. The IRS found that the trust agreements themselves were established with the overarching intent that the retained interest be a qualified one so as to satisfy the tax criterion. Moreover, and pursuant to the judicial reformation of trusts to correct scrivener’s error, amendment is permitted where it was necessary to achieve the settlor’s tax objectives. Accordingly, the IRS held that the grantor’s retained interest was a qualified one thereby validating each GRAT under the tax law, effective as of the date each was created.
IRS Recognizes Retroactive Validity of GRAT Based Upon Court Reformation
