jba <jbal...[at]gmail.com> wrote:

- quote -

I suspect the reason you are not getting any takers is
because you are asking for answers to a fairly sophisticated
tx situation, and one that does not pop up every day. That
means that someone is going to have to do some research to
help you. There are many extremely kind people on this
forum, all of who are volunteering their services in
answering questions. Answering your question is going to
require a significant amount of work and it will be to
answer a question that is not likely to come up again in
most professionals' practices, so there's not much incentive
to look into it for free. I'd strongly recommend that you
seek out a tax attorney, or CPA, or EA who has some
experience with estate planning and with foreign trust
issues if you'd like to pursue this further.

--Chris

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

The Trust has unrealized capital gains and losses in the
beneficiary's investment accounts. If realize the gains in
the trust, we either have to pay out the income to the
beneficiary or pay tax at trust tax rates---neither one of
which is desirable. If the surviving spouse dies with an
unused loss, the loss is wasted since his assets get stepped
up to market value at death. If, however, the gains can be
realized in the Trust and taxed on the beneficiary's return
(by making the Trust a grantor trust), then the basis of the
Trust investments is increased--no tax is paid currently and
beneficiaries save capital gains tax in the future-15%, 20%,
or ??%.

I am still working on the 679 possibility. I'm curious why
no one seems to want to look seriously at it. It's probably
unfamiliar to most people, but I still think it will work
very well. Look at the definition of "foreign" trust--sec.
301.7701-7. It has nothing to do with moving money to a
foreign country, and the trust income is taxable to the
"transferor". Furthermore, I don't mind if we have to
recognize a gain per sec. 684, since that's what we want to
do anyway.

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cptbanjo[at]aol.com wrote:

- quote -

The ascertainable standard language is written into section
2041 but not section 678. So the courts interpret the
requirement in 678 that the beneficiary have the power to
vest property in himself to mean an unrestricted right.
Without specific language in the statute, it's not
surprising that the rules round be fuzzier.

Stu

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jba wrote:
- quote -

Thanks. I wasn't aware of that case.

Basically what it says is that having a limited power of
appointment is not a "to vest the corpus or the income
therefrom in himself" because any power to do so is limited
by a standard.

I've seen it done the other way - where property is included
in the taxable estate of the beneficiary for estate tax
purposes, but the income is not for income tax purposes.
But it may not work the way you would like it to.

- quote -

Section 679 concerns foreign trusts with US beneficiaries.
They don't want people to set up trusts in another country
but have beneficiaries in the US, and allow them to get out
of responsibility for tax on the income produced by those
assets. It says the grantor is taxable, but has nothing to
do with making the beneficiary taxable.

- quote -

That's actually not the only case - there turn out to be
several others. Apparently the provision in 678 that says
the person must be able to "vest" the property "in himself"
does not apply when the power is limited.

- quote -

This is a very unusual request, so it's not the kind of
thing most people would know off the tops of their heads.
And it can't be guaranteed in advance that a way will be
found.

One approach would be to carefully parse the provisions of
section 678 against the requirements of section 2041 and see
if some sort of distinction could be found that would
support your goal. But on my brief review I have not been
able to find one. The only thing I could find was to give
the person the unlimited right (not restricted by a
standard) to withdraw all the income, but not more than 5%
or $5,000, whichever is greater. That would exclude it from
his estate, but include at least a portion of it in his
income tax.

But I don't know if that would accomplish your goal.

Explain again, if you would, why you want the beneficiary
taxed on income generated by the trust? The stepped up
basis is as a result of inclusion in estate tax and not
related to income tax issues, so I don't really understand
why you need to do that. Remember that any income actually
distributed is taxed to the beneficiary.

Stu

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jba <jbal...[at]gmail.com> wrote:

- quote -

In addition to the DeBonchamps case, there are Funk v. CIR,
185 F.2d 127 (3d Cir. 1950) ("needs" deemed a sufficient
limitation) and Smither v. US, 108 F. Supp. 772 (S.D. TX
1952), aff'd 205 F.2d 518 (5th Cir. 1953) ("support,
maintenance, comfort, and enjoyment" is a sufficient
standard) that hold that an ascertainable standard over the
beneficiary-trustee's distribution powers keeps a trust from
being a grantor trust. Interestingly, these standards are
much broader than that permitted by section 2041.

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

Exactly!

- quote -

Some say yes, most say no--based on US v. DeBonchamps.
Why do you say my only way--did you look at section 679?

- quote -

Right.

- quote -

Yes. There is no "standard" in the 678 statute--only the one
court case as far as I know. Unfortunately, that is enough
to stop most CPAs from filing as a grantor trust--and you
can't really blame them-- it's basically the only data point
they have on the issue.

- quote -

I think you understand the goal perfectly. The only
question is how to get there, and I'll be happy to pay
reasonable legal fees for something of value. I'm not
inclined to pay somebody to think deeply about something
that they should already know.

There is no such thing as precision on this kind of
stuff--only reasoned judgement based on knowledge and
experience. Just like most professions, most don't want to
get out of their comfort zone.

Thanks again for your interest.

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jba wrote:

- quote -

So what you want is a trust in which the income is taxed to
the trust beneficiary for income tax purposes but is not
included in his estate for estate tax purposes. This kind
of thing is sometimes referred to as a "defective" trust.

Your only way of having someone other than the original
grantor be considered the owner for income tax purposes is
under section 678, which is the person has or had "a power
exercisable solely by himself to vest the corpus or the
income therefrom in himself...."

So then you have to go over to the estate tax and see if
there are any circumstances under which someone having that
kind of power will not be treated as the owner for estate
tax purposes. And that kind of power is known as a power of
appointment. See sections 2041. A "general" power of
appointment makes the property over which the power can be
exercised includible in the beneficiary's estate.

A power by a trustee to pay himself principal or interest is
not a general power of appointment only if it comes within
the definition of a limited power of appointment. That
would occur when the power "is limited by an ascertainable
standard relating to the health, education, support, or
maintenance of the decedent shall not be deemed a general
power of appointment."

So it appears that a power to invade may cause the income to
be taxed if it is limited to an ascertainable standard.

I have not researched this to be sure it would actually
work. But it appears to be this is the only way to
accomplish what you want, if it can be achieved at all.

Whether that is actually your goal or you are actually
looking to do something different but haven't expressed
yourself clearly enough, you should invest several thousand
dollars in having a tax attorney figuring out exactly the
best way to do what you wish. This is a very precarious
assignment, and must be done very carefully and precisely.

Stu

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

The trust terms and language are specified in the decedent's
will. We couldn't give the surviving spouse a general power
if we wanted to-- but we don't want to because thaat would
make the trust assets subject to inclusion in his estate.
The trust is established, has its own EIN and is funded.
The only question is whether we can make it a grantor trust
without jeopardizing it's "bypass" status. That's why I'm
pursuing the 679 possibility.

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jba wrote:

- quote -

No, that's what the statute says. If the beneficiary is
given a general power of appointment it's basically
considered his. If it's a special power of appointment,
it's not. Section 2041(b)(1)(A) says that a power is
"special" when,

"A power to consume, invade, or appropriate property for the
benefit of the decedent which is limited by an ascertainable
standard relating to the health, education, support, or
maintenance of the decedent shall not be deemed a general
power of appointment."

- quote -

You're required to send the trust to the IRS if there's a
706. If not you may fly under the radar, but I wouldn't bet
on it.

As I have said before, you don't need to stress about making
it a grantor trust. Just let the surviving spouse have
total control over it and it's a completed gift, which she
is taxed on. Is there a problem with that?

Stu

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"cball...[at]tyyni.net" <cball...[at]tyyni.net> wrote:
- quote -

The ultimate goal here is to take gains in the trust, have
them taxed to the beneficiary at his lower rate (he has a
carryforward loss that is of no use after at death, since he
will get a step-up in basis anyway). With the grantor
trust, you don't have to make a distribution from the trust
which would be undesirable for future estate tax and
liability reasons.

Here's where I'm coming out on this. This is a "regular"
testamentary trust. Strict reading of the statute says it's
probably a GT under 678, since 678 has no "standard"--there
are a couple of old conflicting PLR's and one court
case---U.S. v. De Bonchamps??, I think, that says if there
is a reasonably definite standard, then it's not a grantor
trust. (9th circuit, left coast) And that's what most
practitioners go by. Apparently nobody wants to challenge
it, including the IRS. It seems ome are just filing as
grantor trusts anyway. From what I understand 1041's are
never audited, and if you "wrongfully" assume it's a grantor
trust from the beginning, you wouldn't get an EIN and you
wouldn't file a 1041.

Re Sec. 679 grantor trust--if there is a "foreign" trustee
with the power to make one single "significant" decision
(like what to call income and what to call principal)
without getting "vetoed" by the US trustee(s), it's not a
domestic trust and therefore a foreign trust. See sec.
301-7701. If it has a US beneficiary then it's a grantor
trust for the "transferor", and sec 684 does not apply since
being a grantor trust under 671-679 is one of the
exceptions. (In my case, even if sec 684 applied, I'd do
it because I want to take the gain in the Trust.)

Thanks again to all of you who have weighed in on this, and
I'd appreciate any further thoughts. Surely someone has
been down this road before.

P.S. Even if you don't want to sell assets and take gains,
etc--once it's a grantor trust, high basis assets in the
surviving spouses estate can be swapped for low basis assets
in the trust. It's not a sale--there's no gain or loss--it
gets the assets in the right place to maximize step-up. I'm
sure there are other reasons/applications as well.

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jba <jbal...[at]gmail.com> wrote:

- quote -

Section 673(a): "The *grantor* shall be treated as the owner..."
Section 674(a): "The *grantor* shall be treated as the owner..."
Section 675: "The *grantor* shall be treated as the owner..."
Section 676(a): "The *grantor* shall be treated as the owner..."
Section 677(a): "The *grantor* shall be treated as the owner..."
Section 678(a): "A person other than the grantor shall be treated
as the owner..."

It seems pretty clear that the grantor is the only person
who can be treated as the owner under any of the normal
grantor trust rules, except under section 678.

Just in case there is any doubt:

Reg 1.671-2(e)(6), Example 4: "A creates and funds a trust,
T. A does nto retain any power or interest in T that would
cause T to be treated as an owner of any portion of the
trust under sections 671 through 677. B holds an
unrestricted power, exercizable solely by B, to withdraw
certain amounts contributefd to the trust before the end of
the calendar year and to vest those amounts in B. B is
treated as the owner of the portion of T that is subject to
the withdrawal power under section 678(a)(1). However, B is
not a grantor of T under paragraph (e)(1) of this section
because B neither created T nor made a gratuitous transfer
to T."

This does leave open the possibility of having the husband
be a grantor if teh husband makes a gratuitous transfer to
the trust. This could have estate and gift tax
ramifications, though...I'll have to give it some thought.

- quote -

"Ascertainable standard" means that there is supposed to be
an objectively determinable amount that needs to be
distributed to the surviving spouse for health, education,
maitenance, and support. There is no "discretion" in the
ascertainable standard amount. If the surviving spouse
ignores the ascertainable standard and instead treats this
as a general power of appointment, then you get to have your
grantor trust status under 678, but the trust is also
included in the surviving spouse's estate under 2041.

- quote -

But 675 does say "grantor". Once you can convince Congress
to change 675, then this might a possibility.

- quote -

You haven't created a new trust here, so you don't create a
grantor trust. What you have done is just made the trust a
foreign trust, triggering tax under section 684. If you
transferred the assets to a new trust with a foreign
trustee, you still have the 684 problem (which is probably
not a huge issue with the step-up in basis), but the new
trust is treated as a grantor trust owned by the appointing
trust, not owned by the trustee husband. See Reg
1.671-2(e)(6), example 8.

- quote -

With 678 and 2041, I don't think you can have it one way
without creating problems on the other end.

I think the only way around this would be to have the
husband and wife both be grantors of the trust (i.e., both
would transfer assets into the trust when it is set up).
Then when one dies, the other remains as a grantor.

--Chris

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

I'm not sure, but I think the OP is looking for a way to
transfer huband's low basis assets into the trust in
exchange for the trust's high basis assets, without
triggering a tax on the exchange. If the trust is treated
as the husband's grantor trust, then the exchange of the
property would be seen as a non-event from an income tax
perspective.

--Chris

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- quote -

My suggestion would be to consult an experienced estate
planning specialist that can evaluate the whole situation
thoroughly rather than trying to "roll your own" via
usenet...

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jba wrote:

- quote -

It's pretty easy to set it up. Just allow the
trustee/beneficiary to distribute the property to himself at
any time. It will be considered a completed gift to that
person, even if it remains in trust. But if you do that,
why even bother using a trust?

But I still don't understand why. As far as income tax is
concerned, the B trust generally distributes all its income
to the surviving spouse anyway. The trust gets a deduction
for the distributions, and the surviving spouse is taxed on
all the income. So it works out the same both ways.

- quote -

If you don't use an ascertainable standard, then it doesn't
qualify under section 2056, but instead becomes a grantor
trust.

- quote -

The best way (unless there's some reason you don't want to
do it that way) is to make it a completed gift to the
survivor. If you want it retained in trust, that's ok as
long as it's clear from that time on it all belongs to and
is under the control of the survivor.

If that won't work, you could take a tip from the Crummey
Trust. Set up the trust exactly as you would like, but give
the surviving spouse 30 days to withdraw it all from the
trust for any reason. If not done in 30 days the power to
withdraw lapses. That will be considered a completed gift
to the surviving spouse, and the lapse leaving it in the
trust will cause the survivor to the the grantor. Then it
will be a grantor trust if it qualifies under any of the
statutes defining the trust.

For example if the surviving spouse is also the beneficiary,
she will have the power to control beneficial enjoyment of
the trust. It will thus be a grantor trust under section
674.

Stu

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

Thanks again. What I want to accomplish is to make the
bypass trust a grantor trust. There are substantial income
and estate tax advantages. I'm still not convinced it isn't
already--i.e. that the beneficiary could be the "owner" for
income tax purposes under 674, 675, etc.

In addition, the surviving spouse is the trustee and the
trustee's power to appoint to the SS is subject to an
ascertainable standard to avoid 2041. Theoretically the
ss/trustee could appoint income and corpus to himself in any
amount and anytime he decided he needed $ for HEMS in his
sole discretion. There is no ascertainable standard in 678,
and already we know that lapse of 5 and 5 powers results in
partial grantor trust status.

If it truly is not already a grantor trust, then I would
like to take action to make it one. Suggestions would be
appreciated. Possibilities include (1) Beneficiary borrows
from the trust w/o adequate security--even though 675 says
"grantor" (2) Appoint a foreign, e.g. Canadian Bank,
trustee--679 says the "transferor" is the owner (3) reform
the trust (with court approval) to include one or more
powers that make it a grantor trust w/o making it subject to
estate tax (By your analysis, it would have to be a 678
power--Q. Is there a way to give a 678 power to achieve GT
status w/o 2041 concerns?) Obviously #2 and #3 are more
trouble, cost more, have additional reporting, etc.

Thoughts?

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"cball...[at]tyyni.net" <cball...[at]tyyni.net> wrote:

- quote -

Yet were it not for the ascertainable standard governing
distributions by the trustee, the trust would clearly be
deemed to be owned by the husband under Section 678.

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jba wrote:

- quote -

Only a grantor could be treated as a grantor under §674. A
beneficiary, or other person, might be treated as a grantor
under § 678, if the statute provides that the person is
treated that way. Under that section a beneficiary can be
taxed on trust income to the extent he (briefly) has or had
the power, exercisable only by himself, to distribute
principal to himself.

- quote -

You still haven't given all the information requested, and
if it's a trust qualifying under §2056 that could add a
level of complication. But normally those rules apply only
to grantors, not to anyone else, except as noted above.

- quote -

That's done frequently in §2056 trusts. The trustee has the
ability to allocate property to either the A trust or the B
trust, as long as each trust is funded with assets with the
proper values.

- quote -

It depends on what purposes you mean. There are two basic
purposes of these trusts. One is to avoid probate. The
other is to avoid unnecessary estate taxes.

By definition it's not a "bypass" trust if it's included in
the surviving spouse's estate, becase in that case it would
not bypass that estate.

Just tell us exactly what you are trying to accomplish, and
you might get a useful answer. But so far vague questions
really don't have any practical meaning.

Stu

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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

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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Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

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.

- quote -

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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"cballard[at]tyyni.net" <cballard[at]tyyni.net> wrote:

- quote -

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.

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.

- quote -

Agreed.

Stu

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