The Mistake is Mutual, InDEED

On Nov. 2, 2012, the Internal Revenue Service released Private Letter Ruling 201244014, determining that an erroneous naming of Trust 2, instead of Trust 1, as the grantee of a deed didn’t result in a completed gift by the grantor.  As such, the grantor could proceed to correct the mistake by filing a civil action and asking the court to reform the deed on the grounds of mutual mistake.

True Intentions

The grantor and his spouse jointly owned their personal residence and created Trust 1 and Trust 2, respectively.  Trust 1 and Trust 2 were to qualify as personal residence trusts.  The grantor executed a deed with the intent to transfer his interest in his residence to Trust 1; his spouse similarly executed a deed, intending to transfer her interest in the residence to Trust 2.

Upon review of the grantor’s estate, an error was discovered: The deed named Trust 2, rather than Trust 1, as the grantee of the grantor’s interest.  To fix the error, the grantor intended to file a civil action, asking the court to reform the deed.  However, prior to filing the action, the grantor asked the IRS to rule that: 1) the error didn’t result in a completed gift to Trust 2; and 2) if the court did reform the deed, the grantor’s transfer to Trust 1 was a completed gift.

The IRS first determined whether the error was more than a mistake on the part of just one of the parties or whether the mistake was mutual.  Based on the facts, the IRS ruled that the original deed didn’t reflect the parties’ true intentions and, instead, was a scrivener’s error.  Given that both the grantor and his spouse didn’t get what they intended, court reformation was appropriate.

Complete?

The IRS next ruled that if the court reforms the deed as the grantor proposed, under Internal Revenue Code Section 2501 and Treasury Regulations Section 25.2511: 1) the transfer to Trust 1 would be a completed gift for federal gift tax purposes, and 2) the grantor didn’t make a gift to Trust 2.