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Posted by jba on October 8, 2007, 6:43 pm
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>> Husband is the primary beneficiary of the wife's
>> testamentary credit shelter trust.
>>
>> Since the trust allows the husband's inter vivos
>> distribution of corpus to one or more descendants without a
>> reasonably definite standard, it does not meet the
>> requirements for an exception under =3DA7674(b)(5). As a
>> result, I have concluded that (1) the trust is a grantor
>> trust for income tax purposes under =3DA7674(a), and (2) the
>> trust assets are not includable in the surviving spouse's
>> estate at death under =3DA72036 or =3DA72038 despite the
>> retained beneficial interest or powers.
> I think your problem is that the husband is not the
> "grantor" so =A7674 does not apply. Remember that a credit
> shelter trust is generally made up of assets belonging to
> the deceased spouse and not the surviving spouse.
>
> The income is taxed to the husband because income
> distributed from a complex trust is taxed to the recipient.
>
> Whether or not the assets are included in the surviving
> spouse's estate is determined under =A72056, not 2036 or 2038.
>
> Of course I'd have to read the precise wording of the trust
> to be sure, but that's normally how credit shelter trusts
> are drafted.
Thanks for the input and for helping to focus the issues. If
the surviving spouse can't be the "grantor" for tax purposes
because it is the decedent's trust---Then, are we sure the
beneficiary can't be the owner for tax purposes under 674?
What if he had the power to add a class of
beneficiaries--like wives of descendants or charities? What
if he had the power of substitution?--see 675(4)(c)--675
also says "grantor". What if he can take a market-rate
interest loan from the trust without putting up "adequate"
security? See 675(3).
I don't think any of these powers would cause the trust to
be included in the surviving spouse's estate, yet they are
rarely given. The power of substitution power would be a
natural one to include. Think of it this way--if it were a
grantor trust, the "owner" can exchange assets with the
trust's assets without a sale occurring--for example high
basis assets can be exchanged with low-basis trust assets,
thereby getting a step-up on them at the owner's death.
If it is not a grantor trust, because 675 says "grantor" and
the grantor is deceased--then why not give the surviving
spouse the ability to substitute assets for equivalent
value. Even if there is no basis improvement, I'm sure that
it would be a useful power to have in many situations. So,
if it doesn't cause an estate tax problem-- and it
doesn't--why doesn't anyone give the surviving spouse this
power?
One answer is because they're afraid it might make it a
grantor trust, and that might somehow make it more likely to
be included in the surviving spouse's estate--just a guess.
It may me just a holdover--doing it the same old way bygone
days when individual rates were significantly higher than
trust tax rates.
Finally, suppose also that I don't care if the bypass trust
gets included in the surviving spouses' estate, e.g. the
total would be less than the exemption. What powers or
actions would produce a grantor trust result in the meantime
without changing the basic purposes of the trust?
Any additional thoughts would be appreciated.
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