A joint revocable living trust is a single trust created by a husband and wife, into which they transfer their assets. The trust provides that while both spouses are living, the trust income and principal shall be paid to either or both of them as they desire. Finally, any assets remaining in the trust after both spouses have passed away avoid probate.
Checklist of Potential Tax Dangers for Joint Revocable Living Trusts
There are a number of significant tax problems that occur by the administration of joint revocable living trusts. Many of these potential pitfalls have not yet received IRS attention. Because of this, there are not many definitive cases or rulings to provide guidelines. Below are some potential tax issues:
- Transfers of assets to the trust may be taxable gifts. Furthermore, these gifts may not qualify for the unlimited gift tax marital deduction.
- If the trust, or a portion of the trust, becomes irrevocable at the death of the first spouse, the surviving spouse may be considered to have made a taxable gift to the beneficiaries of the irrevocable trust.
- At the death of the first spouse, it is unclear whether one‑half the value of the trust is in his/her estate or whether the entire trust is with it.
- At the death of the first spouse in a non‑community property state like Virginia, it is unlikely that a basis step-up will be obtained for the entire principal of the trust.
- If assets contributed to the trust by each spouse are commingled in a joint trust, it may not be possible to keep what is intended to be a credit‑shelter trust from being included in the surviving spouse’s estate.
- At the death of the first spouse, a tax consequence may occur with assets. These assets include annuities and retirement plans. Furthermore, these accounts either have to be divided and distributed to take advantage of the lifetime credit (causing an income tax problem), the assets may be unavailable to fund the lifetime credit (or by-pass) trust thereby wasting the decedent’s estate tax credit.
How a Taxable Gift Occurs When Funding a Joint Revocable Trust
Funding for a joint revocable living trust may give rise to immediate taxable gifts. Property contributed to a joint trust by the spouses can be unequal in value. In this case, a gift occurs. The value of the property contributed by each spouse can also be equal. However, the spouse with a shorter life expectancy could have made a gift. This occurs when one spouse has a longer life expectancy. This is because of the actuarial value of the second spouse’s interest in the trust is larger.
Further, if a gift occurs on the creation of a joint revocable living trust, that gift may not qualify for the unlimited gift tax marital deduction. This is because. 1. the interest is terminable because the donor‑spouse receives an interest in the property if he survives the donee spouse. 2. the interest doesn’t qualify for the QTIP marital deduction election. This is because under the terms of the trust the donee spouse does not receive all income from the trust. Furthermore, the trustees can distribute the trust principal to the donor‑spouse during the donee spouse’s lifetime.
Contact our DC Law Office for More Information
For more information regarding tax issues associated with joint revocable living trusts, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.