State Court Reformation to Remove Potential General Power of Appointment Not an Exercise or Release of a General Power

In PLRs 201920001, -20002, and -20003, the IRS determined that the reformation of three trusts for the benefit of the grantor’s grandchildren to remove language that could be construed as granting a general power of appointment to each grandchild would not result in adverse tax consequences to the grantor or his grandchildren.

The petition to reform the trusts was supported by three affidavits, one each from the grantor’s accountant, law firm, and trustee of the trusts, providing that the grantor intended for the trusts to be GST exempt, and that the grantor did not realize that the powers of appointment granted to each grandchild under the trust instrument would result in inclusion of the trust’s assets in the grandchild’s gross estate. 

Specifically, the IRS determined that the reformation would not cause corpus of the trust to be included in the grantor’s gross estate; the reformation revising the power of appointment so that it was limited to the grantor’s lineal descendants and excluded the grandchild, the grandchild’s creditors, the grandchild’s estate and the creditors of the grandchild’s estate, wasn’t a release or an exercise of a general power of appointment; and the assets of a deceased grandchild’s trust would not be included in the grandchild’s gross estate under Code § 2041.

The IRS respected this state law reformation respected because there was clear and convincing evidence of a scrivener’s error. 

LISI 60-Second Planner: PLR 201920001 — Trust Reformed to Correct Scrivener’s Error. Leimberg Information Services, Inc. (LISI).

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