Changes are allowed to a generation skipping trust under IRC section 2642(a) having an inclusion ratio of zero only if the inclusion ratio is not increased by the change [EPTL section 11-1.11(b)(1)].

A grantor or a beneficiary serving as a trustee of an express trust can not participate as a trustee in the exercise of the power to amend such express trust [EPTL section 11-1.11(b)(2)]. If two or more trustees are serving, the other trustees may exercise such power, but all trustees [except disqualified trustees under section 11-1.11(b)(2)] must join in the amending process [EPTL section 11-1.11(f)].

The proposed amendment must be in writing, signed by all of the trustees qualified as such (other than those disqualified to so act). This written amendment must be acknowledged in the manner required by law for the recording of a conveyance of real property by the trustees and filed with the clerk of the court that has jurisdiction over the instrument. Notice of the amendment, together with a copy of the amendment, shall be sent by registered or certified mail, return receipt requested, or by personal delivery, to all persons interested in the trust or to the guardian of the property, committee, conservator, adult guardian, or personal representative of any such persons under a disability or to the parent or person with whom a minor resides. The notice must state that unless acknowledged objections to the amendment are received by the trustee within 30-days, the proposed amendment will be filed with the appropriate court and become effective [EPTL section 11-1.11(i)]. Proof by affidavit of the mailing or delivery of such notices or by signed acknowledgement of receipt of such notices must be filed along with the amendment.

Objection to any amendment must be in writing, acknowledged and filed with the trustee prior to the end of the 30-day notice period. If the trustee receives no objections prior to the filing, the changes are effective upon filing and no judicial proceeding or consent of any parties interested in the trust is required [EPTL section 11-1.11(d)].

The fact that a testamentary trust cannot be revoked, altered, or amended by reason of the testator’s death or that a will or trust instrument is irrevocable or cannot be altered or amended does not constitute an express prohibition within the meaning of the first phrase of section 11-1.11(a). It remains for case law or commentary to determine what would constitute an express prohibition against these procedures. In the case of a will, the amendment is deemed to have been effective as of the date of death and in the case of any other instrument, on the date the instrument otherwise became irrevocable [EPTL section 11-1.11(e)].

The change must have “no significant dispositive effect” (EPTL section 11-1.11(a)]. The amendment would be deemed conclusive where the difference between the actuarial value of the respective interest subsequent to the amendment and the actuarial value of the interest prior to the amendment does not exceed 5% of the actuarial value of preamendment interests [EPTL section 11-1.11(i)].

Many recent tax cases have seen the IRS challenging estate tax deductions (charitable or marital) which required postmortem judicial modifications to trusts in order to qualify an interest for the deduction. The changes sought were often ministerial in nature and only corrected minor drafting errors or omissions. The deductions were challenged because the proceedings were usually nonadversarial state court proceedings to which the IRS was not a party [see Starkey, Kenneth Est., v. U.S. (1999, DC IN), 83 AFTR 2nd 99-843]. With that kind of history, can the fiduciary making such a change (or advisor recommending such a change) feel secure, or should they anticipate an IRS challenge on the item? The rulings and cases where the IRS has accepted state court reformation of trust terms were reformations authorized under the Tax Reform Act of 1969, the Tax Reform Act of 1976, and where specifically authorized under the IRC [e.g., IRC section 2056(d)(5)] and then only where the reformations were initiated in a timely manner. Only time can reveal how the IRS will regard changes made under authority of EPTL section 11-1.11.

State and Local Editor:
Stewart Buxbaum, CPA
S. Buxbaum & Company, P.C.

Interstate Editor:
Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

©2009 The New York State Society of CPAs. Legal Notices