Credit Shelter Trust - powers of and over trustees?

The independent trustee must be the one who decides what distributions from principal the surviving spouse gets. If the surviving spouse has the right to replace the trustee, the IRS may claim that she can replace the trustee until she finds one who does what she wants, in effect that she has the power herself to decide what she gets, which is a no-no.

On the other hand if the surviving spouse is the trustee, she can decide what she gets from principal, as long as it measured by a standard approved in the tax code (e.g. health, maintenance, education).

Normally the surviving spouse would want to use up what's in the survivor's trust before the CST, since the survivor's trust will be subject to estate tax when she dies, but the CST will not.

It's primarily about having the ability to preserve two estate tax exemptions, because when one spouse leaves everything to the second spouse, one of the exemptions is wasted otherwise.

In my experience it's probably better to have the surviving spouse be the trustee. That normally doesn't lead to problems.

I haven't researched this lately. The last time I looked into it, there was no good authority on the issue, other than IRS rulings that didn't like the general ability to replace trustees, without any nuances that might be helpful.

Just to be clear -- if you use an IRC-approved standard you don't have to have an independent trustee at all? The surviving spouse can be the sole trustee? What distributions are typically allowed when the independent trustee approach is taken? A right to H, M, E plus whatever the independent trustee can be convinced to approve? What decision criteria would an independent trustee use?

As for a "health, maintenance, education" standard, health seems pretty obvious, education also seems somewhat obvious (though would something like Elderhostel count or does it have to be a formal educational program?), but what is considered maintenance? Just the ability to maintain the pre-spouse's-death lifestyle? So no fancy holidays or buying a vacation home if those sorts of things weren't done while married?

Of course, if the estate were less than or only slightly more than the amount shielded by the estate tax exemption there might be nothing or very little in the survivor's trust (assuming the CST part of the trust is specified to be funded by the amount shielded by the estate tax exemption -- see my other thread on this).

But you bring up something else here...what is the point of the survivor's trust? Since it's subject to estate tax on the survivor's death anyway, why not leave what would go into the survivor's trust to the surviving spouse outright? Liability protection? Trying to prevent the survivor from spending it all so any residue can fall into a family trust at the survivor's death?

I like that. I'll have to make sure to ask the attorney about that approach should he default to using an independent trustee.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Right.

Yes.

There really are no legal criteria for an independent trustee. The trust generally talks about distributions for the best interests of the surviving spouse, but I think that's about it.

Generally "maintenance" means to maintain the standard of living she has been used to.

In this case death is sort of like a divorce. The deceased spouse's property (often half) goes into the marital trust, and the survivor's property goes into the survivor's trust. The marital trust becomes irrevocable, and the survivor's trust remains revocable.

Because then there may be higher tax than necessary in the surviving spouse's estate.

For example let's say we're talking about two years from now when the estate tax exemption goes back to $1,000,000 (assuming it does). And let's say the couple together have assets of $2,000,000.

Well, husband dies and leaves his property to wife - there's no tax then, of course. But when wife dies she has $2,000,000 (or more) of property at that point. She gets a $1,000,000 exemption, and pays tax on the other $1,000,000.

With the marital trust, the wife can get the benefit from the trust, but it's not counted in her estate when she dies.

How many trusts are you talking about? I thought we were discussing two:

1) Credit shelter trust (CST). Comes into existence and/or becomes irrevocable when I die. Is funded with an amount generally equal to the amount of assets shielded by the estate tax exemption. That appears to be what you are referring to by marital trust above. Is it? 2) Survivor's trust (ST). Revocable. Is funded by everything left over after funding the credit shelter trust.

I understand the point of the CST -- to preserve my estate tax exemption. But what's the point of the revocable survivor's trust? Why not leave those assets to the spouse outright and let the spouse decide if she wants to bother with a trust.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

If you are talking about a living trust, one that covers the property of both spouses while you are both alive, there are more trusts than just the two. You start with the family trust. When one spouse dies everything is then divided between the survivor's trust and another trust that the trustee has the power to designate as a credit shelter trust.

Actually the trustee can designate a part of the trust to be taxed in the estate of the first spouse to die, and the balance to be taxed in the surviving spouse. Those two parts can be left in the same trust, or divided into separate trusts. But they have to have the same provisions. If they are divided, it is for accounting purposes primarily.

The purpose of the survivor's trust is to avoid probate for her estate when she dies. Since it's revocable, she can terminate the trust at any time she wishes.

If avoiding probate isn't important, then you could use testementary trusts, with the will of the first spouse to die setting up the credit shelter trust, and there would then be no survivor's trust.