reformable interest
(3) Reformations to comply with paragraph (2).— (A) In general .— A deduction shall be allowed under subsection (a) in respect of any qualified reformation. (B) Qualified reformation .— For purposes of this paragraph, the term “qualified reformation” means a change of a governing instrument by reformation, amendment, construction, or otherwise which changes a reformable interest into a qualified interest but only if— (i) any difference between— (I) the actuarial value (determined as of the date of the decedent’s death) of the qualified interest, and (II) the actuarial value (as so determined) of the reformable interest, does not exceed 5 percent of the actuarial value (as so determined) of the reformable interest, (ii) in the case of— (I) a charitable remainder interest, the nonremainder interest (before and after the qualified reformation) terminated at the same time, or (II) any other interest, the reformable interest and the qualified interest are for the same period, and (iii) such change is effective as of the date of the decedent’s death. A nonremainder interest (before reformation) for a term of years in excess of 20 years shall be treated as satisfying subclause (I) of clause (ii) if such interest (after reformation) is for a term of 20 years. (C) Reformable interest .— For purposes of this paragraph— (i) In general .— The term “reformable interest” means any interest for which a deduction would be allowable under subsection (a) at the time of the decedent’s death but for paragraph (2). (ii) Beneficiary’s interest must be fixed .— The term “reformable interest” does not include any interest unless, before the remainder vests in possession, all payments to persons other than an organization described in subsection (a) are expressed either in specified dollar amounts or a fixed percentage of the fair market value of the property. For purposes of determining whether all such payments are expressed as a fixed percentage of the fair market value of the property, section 664(d)(3) shall be taken into account. (iii) Special rule where timely commencement of reformation .— Clause (ii) shall not apply to any interest if a judicial proceeding is commenced to change such interest into a qualified interest not later than the 90th day after— (I) if an estate tax return is required to be filed, the last date (including extensions) for filing such return, or (II) if no estate tax return is required to be filed, the last date (including extensions) for filing the income tax return for the 1st taxable year for which such a return is required to be filed by the trust. (iv) Special rule for will executed before january 1, 1979 , etc .— In the case of any interest passing under a will executed before January 1, 1979 , or under a trust created before such date, clause (ii) shall not apply. (D) Qualified interest .— For purposes of this paragraph, the term “qualified interest” means an interest for which a deduction is allowable under subsection (a). (E) Limitation .— The deduction referred to in subparagraph (A) shall not exceed the amount of the deduction which would have been allowable for the reformable interest but for paragraph (2). (F) Special rule where income beneficiary dies .— If (by reason of the death of any individual, or by termination or distribution of a trust in accordance with the terms of the trust instrument) by the due date for filing the estate tax return (including any extension thereof) a reformable interest is in a wholly charitable trust or passes directly to a person or for a use described in subsection (a), a deduction shall be allowed for such reformable interest as if it had met the requirements of paragraph (2) on the date of the decedent’s death. For purposes of the preceding sentence, the term “wholly charitable trust” means a charitable trust which, upon the allowance of a deduction, would be described in section 4947(a)(1). (G) Statute of limitations .— The period for assessing any deficiency of any tax attributable to the application of this paragraph shall not expire before the date 1 year after the date on which the Secretary is notified that such reformation (or other proceeding pursuant to subparagraph (J)) has occurred. (H) Regulations .— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including regulations providing such adjustments in the application of the provisions of section 508 (relating to special rules relating to section 501(c)(3) organizations), subchapter J (relating to estates, trusts, beneficiaries, and decedents), and chapter 42 (relating to private foundations) as may be necessary by reason of the qualified reformation. (I) Reformations permitted in case of remainder interests in residence or farm, pooled income funds, etc .— The Secretary shall prescribe regulations (consistent with the provisions of this paragraph) permitting reformations in the case of any failure— (i) to meet the requirements of section 170(f)(3)(B) (relating to remainder interests in personal residence or farm, etc.), or (ii) to meet the requirements of section 642(c)(5). (J) Void or reformed trust in cases of insufficient remainder interests .— In the case of a trust that would qualify (or could be reformed to qualify pursuant to subparagraph (B)) but for failure to satisfy the requirement of paragraph (1)(D) or (2)(D) of section 664(d), such trust may be— (i) declared null and void ab initio, or (ii) changed by reformation, amendment, or otherwise to meet such requirement by reducing the payout rate or the duration (or both) of any noncharitable beneficiary’s interest to the extent necessary to satisfy such requirement, pursuant to a proceeding that is commenced within the period required in subparagraph (C)(iii). In a case described in clause (i), no deduction shall be allowed under this title for any transfer to the trust and any transactions entered into by the trust prior to being declared void shall be treated as entered into by the transferor.