Credit Shelter Trust in a Community Property State

Stuart O. Bronstein wrote:
- quote -

> Ed Schillmoeller <edschillmoeller[at]charter.net> wrote:

> > My wife and I own and live in a residence in a community
> > property state (Wisconsin). The title to the house is held
> > in a joint trust. When the first spouse dies can the house ,
> > along with other financial assets, be used to fund the
> > decedent's credit shelter trust? If yes, can the surviving
> > spouse live in the house rent free? Assume the surviving
> > spouse would pay all expenses related to the house such as
> > property tax and maintenance.

> Depends on how the trust is drafted.
> In the normal case the trustee is given sufficient
> flexibility to fund the trust with the assets that seem best
> at the time.
> Be careful of this, though. Because if the home owned
> completely by the credit shelter trust the surviving spouse
> will lose the exemption from income for the sale of the
> property.

Are you certain of this? I thought that it still qualified
for that exemption if a beneficiary of the trust used it as
his/her primary residence (and surviving spouses are
normally beneficiaries during their lifetime).... [Or was
that another part of the old IRC 121/1034 that went poof
under the new rules?]

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Ed Schillmoeller <edschillmoeller[at]charter.net> wrote:

- quote -

> My wife and I own and live in a residence in a community
> property state (Wisconsin). The title to the house is held
> in a joint trust. When the first spouse dies can the house ,
> along with other financial assets, be used to fund the
> decedent's credit shelter trust?

Yes, you CAN do that. However, it might not be advisable. If
you put your personal residence into a credit shelter trust,
it loses its characteristic as a "personal residence" for
gain exclusion purposes. Hence, any future sale of the
residence would be a taxable event.

Obviously, you could be faced with a problem if you don't
have enough OTHER assets to fully fund the trust without the
house thrown in. So, you might have to make a difficult
choice. One alternative might be to have the trust funded by
"disclaimer." This would allow the surviving spouse to
basically pick and choose the assets (and amounts thereof)
that go into the trust, based on the facts in effect at the
time. However, this is beyond "do it yourself" planning, so
you should hire a qualified professional planner if you wish
to pursue this angle.

MTW

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Ed Schillmoeller <edschillmoeller[at]charter.net> wrote:

- quote -

> My wife and I own and live in a residence in a community
> property state (Wisconsin). The title to the house is held
> in a joint trust. When the first spouse dies can the house ,
> along with other financial assets, be used to fund the
> decedent's credit shelter trust? If yes, can the surviving
> spouse live in the house rent free? Assume the surviving
> spouse would pay all expenses related to the house such as
> property tax and maintenance.

Depends on how the trust is drafted.

In the normal case the trustee is given sufficient
flexibility to fund the trust with the assets that seem best
at the time.

Be careful of this, though. Because if the home owned
completely by the credit shelter trust the surviving spouse
will lose the exemption from income for the sale of the
property.

As far as her living there rent free, these trusts are
generally drafted to allow the surviving spouse to receive
all trust income and to receive trust principal at the
trustee's discretion, or, if she is the trustee, to withdraw
principal if needed for her health, or maintenance. So if
properly drafted she should be able to live there rent free,
since the rent payments would belong to her anyway.

I'm not convinced (off the top of my head without looking
into it) that she has to pay property tax, etc., herself,
but may be able to have the trust owner pay it. But check
this out before you do it.

Stu

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My wife and I own and live in a residence in a community
property state (Wisconsin). The title to the house is held
in a joint trust. When the first spouse dies can the house ,
along with other financial assets, be used to fund the
decedent's credit shelter trust? If yes, can the surviving
spouse live in the house rent free? Assume the surviving
spouse would pay all expenses related to the house such as
property tax and maintenance.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->