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Posted by cballard@tyyni.net on September 28, 2007, 3:59 pm
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>> Code section 674 says that the *grantor* has to treat a
>> trust as a grantor trust if the *grantor* or a nonadverse
>> party has the power to control the beneficial enjoyment of
>> the trust assets. If its the wife's trust, the wife is the
>> grantor, not the surviving husband. The husband is a
>> beneficiary and trustee, but is not the grantor. The trust
>> was a grantor trust under section 674 while she was alive.
>> With the wife being deceased, section 674 no longer applies.
> To be fair, the code does say that a spouse of a grantor is
> treated as a grantor as well. But I seriously doubt that
> applies after the actual grantor dies, because they are no
> longer spouses.
Not quite. The Code says that any powers held by the spouse
of a grantor are deemed to be held by the grantor, but the
attribution doesn't flow the other direction. Once the
grantor is gone, then section 678 is the only grantor trust
section that can continue to apply because there is no
longer any grantor--the surviving spouse can only be treated
as the grantor if he or she has the power to distribute
discretionary amounts of income or corpus in himself or
herself.
> In addition, 2056 basically provides for marital trusts.
> In general the surviving spouse receives all the income from
> the "B" trust, so it's taxed to her in any case,
> irrespective of grantor trust rules.
This is true for the marital trust (if one was set up under
the estate plan), but not necessarily true for the credit
shelter trust (which was the subject of the OP's question).
The credit shelter trust could bypass the surviving spouse
entirely. It's not the usual way to set it up, but if the
surviving spouse is independently wealthy and the deceased
spouse's kids need the funds, there is no tax requirement to
name the surviving spouse as a beneficiary of the credit
shelter trust.
--Chris
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