Joint RLT - Separate share inside survivor's trust

Tweet

 

Query: The typical joint A/B trusts I have dealt with left the survivor's trust revocable and the decedent's trust was irrevocable, so I still don't see why a share of the survivor's trust (funded with property from the deceased spouse's estate) becomes irrevocable.

I am not following how it would work in practice to have one property owned by different shares of the survivor's trust, e.g. how would community property investments or real estate be handled if only the decedent's share is allocated to the irrevocable separate share?

Response: The portion (or separate share) of the survivor's trust that gets funded with the dead spouse's property has to be irrevocable to satisfy the requirements of Reg. §1.401(a)(9)-4, A-5 so the trust will qualify for the stretch if funded with an IRA, and to satisfy the requirements of Code §2056(b)(5) to make sure we don't blow the marital deduction. (That's not a problem if the property is distributed outright to the spouse.)

As far as treatment of community property (and I'm not a community property expert), I don't know how there can be "community property" anymore between an entity (dead spouse's irrevocable trust) and a person. The dead spouse's property (community or separate) would be added to the separate share of the survivor's trust, except that which the survivor disclaims to the bypass. That property will then be titled accordingly. If the property was community property, it will then be held effectively as tenants in common, owned one-half by separate share of the survivor's trust and one-half by the surviving spouse's contributed portion of the survivor's trust. (For practical purposes, I don't know why this couldn't be handled as a bookkeeping entry, since the terms of the trust will govern the administration of the property. This would allow the property to be titled in the name of the "Survivor's Trust.")

Although the "separate share" is irrevocable for the reasons indicated above, note that the surviving spouse has a testamentary general power of appointment over the entire survivor's trust. Not only does this allow the survivor to alter the distribution of the assets when the survivor later dies, it causes full estate inclusion over the survivor's trust, giving the remainder beneficiaries a step up in basis when the surviving spouse later dies. Code §1014(b)(4).

Matthew T. McClintock, JD
WealthCounsel.com