Penalty for trust distributions by "related or subordinate" trustees

The penalty is that the kids can sue the surviving parent for taking out too much. I suppose it would be possible for the IRS to tax the entire value of the decedent's trust in the estate of the second parent if they can show the restriction wasn't being followed, but I haven't heard of that happenning.

No.

No. The issue is what qualifies for the marital deduction and what doesn't. The decedent's trust holds property that is not supposed to qualify for the marital deduction (it actually saves taxes if you do that sometimes). But if the survivor treats that trust as her own, it might be possible for the IRS to treat it as her property and tax her estate on it, even though the trusts are drafted to avoid that situation.

Not more than otherwise.

Stu

If a beneficiary has the ability to distribute a discretionary amount of the the trust to himself or herself, the beneficiary may be treated as having a general power of appointment over the trust, which would result in the assets of the trust being taxable in the beneficiary's estate. The ascertainable standard permits a surviving spouse to serve as trustee of a credit shelter trust without having the credit shelter trust included in her estate. This works because the trust mandates that the trustee must distribute the amount needed for health education and welfare--this amount is supposedly "ascertainable", i.e., it is theoretically an impartial number that can be calculated independently, and is therefore not discretionary. If the parties violate the ascertainable standard, it is possible that the IRS could claim that the ascertainable standard language in your particular trust was a sham and that the entire value of the credit shelter trust could be included in the surviving spouse's estate.

--Chris

Thanks for the answers. I finally heard back from my attorney and she confirms that there could theoretically be penalties for non-compliance but they would be rare.