Judicial Guidance to Trust Reformation Under IRC Section 2055(e)(3)

Ted D. Englebrecht, PhD, and Wei-Chih Chiang, DBA

It is not unusual for a decedent's will to create a split-interest trust, which bifurcates the decedent's estate to charitable and noncharitable beneficiaries. Although the property passes to the trust in whole and is included in the decedent's gross estate, the portion allocated to the charitable beneficiaries can receive a charitable deduction. Of course, this result assumes the statutory requirements are satisfied. Whenever a testamentary trust fails to meet the requirements, a reformation of the trust provisions in the will is needed to secure the charitable deduction. Accordingly, the trust reformation rules in IRC section 2055(e)(3) should be strictly adhered to. While this reformation provision seems unambiguous, several estates have failed to satisfy the reformation requirements and forfeited their charitable deductions in court. Consequently, a review and synthesis of these court cases can provide needed guidance to estates and their tax advisors when seeking a qualified reformation to retain their charitable deductions.