Dee, a 75 year old window created a trust in December of 2000. The trust was created as an irrevocable trust naming her five adult grandchildren as the beneficiaries. The assets transferred into the trust consisted of marketable securities (worth $800,000) and Dee’s personal residence (worth $400,000). Dee designated her brother Austin who is a practicing attorney as the trustee. Other provisions of the trust are:
1- Austin is given the discretion to distribute the income to the beneficiaries based on their need or, the income may be added to the corpus (retained in the trust). Austin is also given the power to change trust investments as well as the power to terminate the trust.
2- The trust is to last for Dee’s lifetime or, if sooner, until termination by Austin.
3- Upon termination of the trust, the principal and any accumulated income are to be distributed to the beneficiaries (Dee’s grandchildren)
For the year 2000, Dee files a Form 709 to report the transger in trust and pays a gift tax based on the value of $1,200,000 (the $800,000 plus $400,000 noted above).
After the transfer into the trust and up to the time of her death, Dee continues to occupy the residence. Although she pays no rent for her occupying the house, she maintains the property and pays yearly property taxes. Dee never discussed the matter of her continued occupancy of the residence with either Austin or the beneficiaries of the trust.
Upon Dee’s death this past year, the value of the trust is $2,300,000, broken down as follows: Marketable securities and cash ($1.6 million and residence ($700,000). Shortly after Dee’s death, Austin sells the residence, liquidates the trust and distributes the proceeds to the beneficiaries.
Prepare a memo discussing the Estate Tax consequences of these transactions.
Hint: Section 2036
Guynn v. U.s., 71-1 USTC 12,742, 27 AFTR 2nd 71-1653, 437 F.2nd 1148 (CA-4, 1971).
Estate of Eleanor T.R. Trotter, 82 TCM 633, T.C. Memo 2001-250.
Estate of Lorraine C. Disbrow, 91 TCM 794, TC Memo. 2006-34
