Is the Credit Shelter Trust a Grantor Trust?

I think your problem is that the husband is not the "grantor" so §674 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 §2056, 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. Stu

jba wrote:

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. The section you want to look at is Code section 678 ("Person other than grantor treated as substantial owner"). Under that section, the trust is treated as a grantor trust if the a person other than the grantor has the power to vest the trust property in himself. This is why (well, one of the reasons why) the power of appointment given to the husband only permits him to appoint the trust property to his descendants, and not to himself or to his creditors. The vast majority of credit shelter trusts are set up to become non- grantor trusts upon the death of the first spouse. The trust must file its own tax return, reporting all of the income the trust received. Either the trust or the beneficiaries will pay the tax on that income, depending on the terms of the trust and whether the income was distributed to the beneficiaries. If the trust was properly drafted, the special power of appointment will not cause the trust to be included in the husband's estate. (This is the other big reason for not giving the huband the power to distribute assets to himself or to his creditors).

In this case, I agree with your CPA. This does not appear to be a grantor trust. The trust should file a 1041 reporting all of the trust's income, and should provide a K-1 to the husband showing the income distributed.

--Chris

I think that theoretically a credit shelter trust could be a grantor trust. But they're usually not structured this way. You have to carefully read the will/trust documents. ___________________________________

-----> real address on hobokeni or hobokenx

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.

Agreed.

Stu