Savings Clauses

Article excerpt

In Brief

The Right Subject Matter

Savings clauses in documents are designed to prevent an adverse result that otherwise might arise. Although the IRS generally views tax savings clauses with disfavor, there are circumstances where a savings clause should be inserted in a document to correct any erroneous interpretations in favor of the taxpayer. The author discusses savings clauses that

* nullify a transfer

* revoke a transfer

* define an amount

* alter terms

* modify fiduciary powers.

Taxpayers will have difficulty with those clauses that include a condition subsequent and attempt to revoke a transfer, alter a completed transaction, or are connected with a determination of value. Alternately, clauses that serve to assist in the interpretation of a document, or explain the parties' intention, will generally be more acceptable.

Savings clauses are included in do ments to prevent an adverse result that otherwise might arise. In PLR 7916006, the IRS defined a savings clause as "a provision that takes away a power or changes a provision that is expressly given elsewhere in the instrument and is, therefore, in direct conflict with that other express power or provision." The IRS's position regarding savings clauses was stated very clearly in PLR 73092590A: "To accept savings provisions as curative for Federal tax purposes would quickly lead to the use of such provisions as a standard estate planning device. Trusts and wills would knowingly be drafted with a number of defective tax provisions. This would lead to chaos in trust administration and, also, to a serious breakdown in the administration of the code provisions under sections 2055 and 2056."

There are various types of savings clauses, some of which will operate to "save the day," and others which will not operate to correct an erroneously drafted document. The IRS generally views tax savings clauses with disfavor, placing reliance on Comm'r v. Procter, [142 F.2d 824 (CA-4, 1944)], which held a savings clause void as contrary to public policy. However, there are circumstances where a savings clause should be inserted in a document and will operate in favor of the taxpayer to correct any erroneous interpretations. In the Procter case, the savings clause at issue operated to nullify a gift in the event of a judicial determination that the transfer was subject to gift tax. The Fourth Circuit agreed that the clause was void as being against public policy because

* it could discourage the collection of tax, in that an attempt to enforce the tax would result in defeating the gift;

* it obstructed the administration of justice; and

* the condition imposed could not become operative, since it required a final judgment and all matters of the agreement including the savings clause would be merged in the final judgment.

The IRS has a tendency to expand the decision in Procter to disqualify marital deductions and charitable trusts, and to assess additional gift tax on intrafamily transfers. For example, in PLR 9717008, the provisions of a grantorretained annuity trust (GRAT) permitted the annuity to be satisfied with a promissory note, and the trustee was authorized to retroactively amend the trust for the sole purpose of complying with applicable IRC provisions and Treasury regulations. Citing Procter, the IRS ruled that the provision for retroactive amendment of the trust would nullify any gift tax consequences resulting from the examination of the gift tax return reporting the transfer and that such a provision was "against public policy and is disregarded for tax purposes."

Similarly, in PLR 9104003, the decedent provided that a bequest to the surviving spouse was intended to qualify for the Federal estate tax marital deduction (to the extent elected by the executor) and "the terms of this will shall be construed in accordance with such intent." Citing Procter once more, the IRS ruled that this spouse's entire interest in the marital trust was subject to a power in the executors to appoint the corpus to someone other than the surviving spouse, and that this savings clause was ineffective in altering that result. …

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