Matter of Relkin

[*1] Matter of Relkin 2005 NY Slip Op 52217(U) [10 Misc 3d 1070(A)] Decided on December 5, 2005 Sur Ct, New York County Preminger, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 5, 2005
Sur Ct, New York County

In the Matter of the Estate of Helen Relkin, Deceased.



3486/2002

Eve Preminger, J.

In this uncontested proceeding, JPMorgan Chase Bank, as executor of and trustee under the will of Helen Relkin, has asked the Court to reform the residuary trust in the hope of qualifying the trust for an estate tax deduction as a charitable remainder annuity trust ("CRAT"), defined in Internal Revenue Code (26 USC) § 664(d)(1) (see Internal Revenue Code (26 USC) § 2055[e][2][A]). Specifically, petitioner seeks a reduction in the annuity to be paid to the life income beneficiary (from 8% to 6.5% of the initial net fair market value of assets constituting the trust) in an attempt to bring the trust into compliance with two separate tax rules. A threshold question in this proceeding one petitioner has ignored is: would the requested reformation constitute a "qualified reformation" under Internal Revenue Code (26 USC) § 2055(e)(3)(B), thereby entitling petitioner to a charitable estate tax deduction?

Article FIVE of the will provides that an annuity equal to 8% of the initial net fair market value of assets constituting the residuary trust shall be paid in equal shares to three individuals, or the survivors or survivor of them testator's predeceased sister, testator's brother Harry Schumer (a person under a disability for whom a guardian ad litem was appointed but who since has died) and Mr. Schumer's daughter Barbara Schumer. Article FIVE further provides that upon the death of the survivor, the trust property shall be distributed to three named charities.

The trust, as drafted, fails to satisfy two criteria of a CRAT: the 10% minimum remainder interest requirement under Internal Revenue Code (26 USC) § 664(d)(1)(D), and the 5% probability of exhaustion requirement under Treasury Regulation § 20.2055-2(b)(1). The original petition, however, cited compliance with the 5% probability of exhaustion rule as the only ground for the requested reformation.

Internal Revenue Code (26 USC) § 664(d)(1)(D) provides that a charitable remainder interest, valued by means of the tables and interest rate under Internal Revenue Code (26 USC) § 7520, must equal at least 10% of the initial net fair market value of the trust. According to the amended petition, as a result of a substantial decline in the interest rate during the period between the execution of the will in 1995 and testator's death in 2002, the trust fails the 10% minimum remainder interest requirement.

Treasury Regulation § 20.2055-2(b)(1) provides that a charitable deduction will be allowed for a charitable remainder trust only if "the possibility that the charitable transfer will not become effective is so remote as to be negligible." Interpreting this language, the Internal [*2]Revenue Service has ruled that no charitable deduction is available if there is a greater than 5% chance that the trust will be exhausted during the lifetime of the life income beneficiary (Rev. Rul. 70-452, 1970-2 CB 199). This is known as the "5% exhaustion rule."

Even if the Court were to grant the requested reformation, it is not clear the trust would qualify for a charitable estate tax deduction. Internal Revenue Code (26 USC)

§ 2055(e)(3)(B)(i) permits the cure of a defect in an instrument governing a charitable remainder trust by a "qualified reformation," provided the difference between the actuarial value (determined as of decedent's date of death) of the remainder interest before and after reformation is not more than 5%. This is known as the "5% variance rule."[FN1] In the instant case, the proposed reformation would increase the remainder interest by more than 5% of the date of death actuarial value of the unreformed remainder interest (from less than 10% to 22% of the initial net fair market value of the trust), thereby violating the 5% variance rule.

Whereas Internal Revenue Code (26 USC) § 2055(e)(3)(J)(ii) provides that a trust that otherwise would qualify or could be made to qualify as a CRAT may be reformed to meet the 10% minimum remainder interest requirement, and legislative history for Internal Revenue Code (26 USC) § 664(d)(1)(D) indicates the 5% variance rule may be relaxed to the extent necessary to do so (Conference Report on H. R. 2014, Taxpayer Relief Act of 1997, 143 Cong Rec H 6562, 6566 [July 30, 1997]), petitioner could cite no authority for a corollary policy of relaxing the 5% variance rule to bring a trust in compliance with the 5% exhaustion rule. Indeed, the Internal Revenue Service has ruled that a trust reformation for the purpose of meeting the 5% exhaustion requirement will not constitute a qualified reformation, as it is "not a change within the purview of section 2055(e)(3)" (Rev. Rul. 77-374, 1977-2 CB 329).[FN2]

A Court may condition reformation of an instrument upon a petitioner's obtaining a favorable private letter ruling from the Internal Revenue Service (see e.g. Matter of Tedeschi, NYLJ, Apr. 29, 2002, at 31, col 5). While it is theoretically possible the Internal Revenue Service would permit a reformation for the purpose of achieving compliance with the 10% minimum remainder interest requirement, which incidentally might cure a defect with respect to the 5% exhaustion rule, petitioner has elected not to pursue a private letter ruling. [*3]

If the trust, even after reformation, should fail to qualify for an estate tax deduction, the Court's reduction of the income beneficiary's annuity would constitute a derogation of testator's intent. Therefore, absent proof the requested reformation would enable petitioner to achieve its objective of a charitable estate tax deduction, petitioner's application is denied.

This decision constitutes the order of the Court.

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S U R R O G A T E

Dated: December 5, 2005 Footnotes

Footnote 1: The powers conferred on New York trustees parallel the 5% variance rule. EPTL 11-1.11(a)(i) authorizes trustees, unless the governing instrument provides otherwise, to amend trust provisions "which have no significant dispositive effects" in order to bring charitable remainder trusts into compliance with Internal Revenue Code (26 USC) § 664. "No significant dispositive effect" is defined in EPTL 11-1.11(i) as a difference between the actuarial value of an amended interest before and after amendment of not more than 5%.

Footnote 2: One commentator has suggested the ruling in Rev. Rul. 77-374, 1977-2 CB 329 "was never justified" and, in light of the 10% minimum remainder interest safeguard enacted in 1997, "should be withdrawn." In the alternative, he has recommended that the Internal Revenue Service specifically relax the 5% variance rule so that a trust not meeting the 5% exhaustion test may be reformed. Under current law, he has posited, it is virtually impossible to reform an annuity trust that fails the 5% exhaustion test. Teitell, Estate Planning and Philanthropy, IRS Wants Suggestions for Specimen CRTS, NYLJ, Oct. 23, 2000, at 3, col 1.