Re: Is the Credit Shelter Trust a Grantor Trust?

> 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. > 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.

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.

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.

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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