My last entry was too frightening to get a response, so let's try something easier.
I have a credit shelter trust that paid income to spouse and upon her death, all income and principal in the trust is to be distributed to the grantor's child and four grandchildren equally. The distributions to the grandchildren are NOT direct skips because the trust was never in grantor's spouse's estate.
These must be either taxable terminations or taxable distributions... but which one is it?
Perhaps I am over thinking this, because it seems obvious to me this should be a taxable termination. I guess the confusion comes from the fact that immediately after the death of spouse, a non-skip persons has an interest in the trust generally (if the trust still even exists that is), triggering 2612(a)(1)(A). However, when I read the code it looks to me like 2612(a)(1)(A) does not occur because the code says it is not an interest in the TRUST generally, but an interest in PROPERTY held in trust, and immediately after the death of spouse a non-skip person does not have an interest in the particular pieces of PROPERTY passing to the grandchildren. Furthermore, at the death of grantor's spouse, the trust terminates, at which point no one has an interest in the trust at all, only interests in the property held therein.
Unfortunately the regulations under 26.2612 say "an interest in trust" versus "an interest in property held in trust" and I have seen contradictory ideas on this topic when I examined other resources.
Which on is it?
I have a credit shelter trust that paid income to spouse and upon her death, all income and principal in the trust is to be distributed to the grantor's child and four grandchildren equally. The distributions to the grandchildren are NOT direct skips because the trust was never in grantor's spouse's estate.
These must be either taxable terminations or taxable distributions... but which one is it?
Perhaps I am over thinking this, because it seems obvious to me this should be a taxable termination. I guess the confusion comes from the fact that immediately after the death of spouse, a non-skip persons has an interest in the trust generally (if the trust still even exists that is), triggering 2612(a)(1)(A). However, when I read the code it looks to me like 2612(a)(1)(A) does not occur because the code says it is not an interest in the TRUST generally, but an interest in PROPERTY held in trust, and immediately after the death of spouse a non-skip person does not have an interest in the particular pieces of PROPERTY passing to the grandchildren. Furthermore, at the death of grantor's spouse, the trust terminates, at which point no one has an interest in the trust at all, only interests in the property held therein.
Unfortunately the regulations under 26.2612 say "an interest in trust" versus "an interest in property held in trust" and I have seen contradictory ideas on this topic when I examined other resources.
Which on is it?