Attorney-at-Law

PROVIDING FOR THE GENERAL WELFARE

In Uncategorized on 07/14/2011 at 16:41

Or, Drafting the Credit Shelter Trust

 Hints for drafters of credit shelter trusts (those designed to remove all non-taxable assets from an estate and pass them on to the heirs) are always useful, and some good ones can be found in Estate of Ann R. Chancellor, 2011 T.C. Mem. 172, filed 7/14/11.

Ann’s husband Lester predeceased her, creating through his will a trust wherein he placed all non-taxable assets, to the maximum amount permitted by law (the so-called unified credit). Judge Thornton takes up the story: “Under the terms of the trust as stated in the will, during decedent’s lifetime the cotrustees were authorized to apportion trust income among decedent, Mr. Chancellor’s children, and Mr. Chancellor’s grandchildren (the beneficiaries) ‘in accordance with their respective needs.’ The cotrustees were also given the right and power to invade the corpus of the trust and to use such part thereof and if necessary, all of it, for the necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed by * * * [Mr. Chancellor’s] wife and the other beneficiaries of this trust taking into consideration the standard of living to which they are accustomed and any income available to them from other sources.’” 2011 T.C. Mem. 172, at p. 2.

Ann’s 706 didn’t mention the trust assets. IRS said she had a general power of appointment over the trust corpus, so they should have been included, and assessed a deficiency.

No question that this is a power of appointment, as Ann could have directed the trust corpus to herself or the kids and grandkids. But the Section 2041(b)(1)(A) exception saves a general power if it is “limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent”.

So we have a two-part test:  “ascertainable standard”,  and “relating to health, education, support or maintenance”.

Lester’s estate plan passes both tests. First, IRS concedes that the “taking into consideration the standard of living to which * * * [the will beneficiaries] are accustomed” satisfies the ascertainable standard test. “Accustomed standard of living” has gotten around the Section 2041(b) slalom for years.

Now for the “relating to the health, education, support, or maintenance” test. IRS says the “welfare or other appropriate expenditures” language flunks the test–too broad. Not so, says Judge Thornton: “maintenance and sustenance” are not restricted to the bare necessities of life. And the “welfare or other appropriate expenditures” language is limited by “taking into consideration the standard of living to which they are accustomed”.

So Ann’s estate is off the hook. And drafters of credit shelter trusts have another phrase for their form files.

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