The IRS recently ruled that the court-ordered reformation of two trusts to correct scrivener's errors will not result in the trust assets being included in the settlor's gross estate.

A husband and wife created two trusts, intending to use them to remove assets from both the husband's and the wife's estates. The attorney who drafted the trusts (the scrivener) told them that the trusts would be effective for this purpose as constructed. However, after the scrivener died, an insurance agent and an estate planner examined the trusts at the request of the husband.

They discovered a few provisions that could cause the trust assets to be included in the spouses' estates. For example:

One trust allowed the trustee to make discretionary distributions to the husband from income and principal.

One trust was to pay any and all unpaid charitable pledges made by either spouse during their lifetimes and to pay any charitable bequests that could not be paid by their estates.

Both trust documents directed the trustees to make discretionary payments of federal and state estate taxes for both spouses' estates.

Both trust documents allowed the trustee to make discretionary payments of the spouses' debts existing at the times of their deaths.

The IRS ruled that the trust reformations will not result in a taxable gift by either the husband or wife.