Contents

ESTATE AND GIFT TAX CONSIDERATIONS• In the case of any other interest, the reformable interest and the qualifiedinterest must be for the same period 222• The change must be effective as of the date of death of the decedent 223A nonremainder interest (before reformation) for a term of years in excess of 20years is treated as satisfying the second of these requirements if the interest(after reformation) is for a term of 20 years. 224In general, a reformable interest, for estate tax law purposes, is any interest forwhich a charitable deduction would be allowable at the time of the decedent’sdeath but for the requirement that the interest be in one of the specified forms. 225For example, an interest was ruled not to be a reformable interest because thetrustees of the trust had the discretion to transfer trust property to a cemeteryassociation, which would be a noncharitable transfer under federal law. 226The term reformable interest does not include any interest unless, before theremainder vests in possession, all payments to noncharitable persons 227 areexpressed either in specified dollar amounts or a fixed percentage of the property.228 This rule does not apply, however, to any interest if a judicial proceedingis commenced to change the interest into a qualified interest not later than the90th day after the last date (including extensions) for filing the return (if anestate tax return is required to be filed), or the last date (including extensions)for filing the income tax return for the first tax year for which a return isrequired to be filed by the trust (if an estate tax return is not required to befiled). 229 Moreover, this rule does not apply in the case of any interest passingunder a will executed before January 1, 1979, or under a trust created before thatdate. 230 There has been considerable litigation in this setting, particularly withrespect to application of the estate tax rules.In one case, a court held that the estate tax charitable contribution deductionwas not available for a transfer to a charitable organization because the giftflowed through a nonqualifying charitable trust. 231 The decedent left a will thatcreated a trust with three purposes: to support his three sisters, to maintain thegraves of his family members, and to provide funds for religious education incertain parishes in a state. Two years after the estate tax return was filed, theestate secured from a state court the authority to establish a charitable foundation.The court later authorized the funding of the foundation with substantialassets from the estate. The estate claimed a charitable deduction for the fundstransferred to the foundation; the IRS denied the claim. Five years later, two ofthe three sisters having died, the state court interpreted the will as establishingthree trusts: one for support of the surviving sister, one for grave maintenance,222 IRC § 2055(e)(3)(B)(ii)(II).223 IRC § 2055(e)(3)(B)(iii).224 IRC § 2055(e)(3)(B), last sentence.225 IRC § 2055(e)(3)(C)(i).226 Tech. Adv. Mem. 9327006.227 That is, entities that are the income interest beneficiaries.228 IRC § 2055(e)(3)(C)(ii).229 IRC § 2055(e)(3)(C)(iii).230 IRC § 2055(e)(3)(C)(iv). See also IRC § 2055(e)(3)(J).231 Johnson Estate v. United States, 941 F.2d 1318 (5th Cir. 1991). 260