Failure to Divide Revocable Trust Upon Death of Spouse Creates Numerous Tax Problems.

This case points out the perils of not dividing a revocable trust upon a spouse's death and not limiting distributions to the surviving spouse to an ascertainable standard when required to do so.  The spouse's revocable living trust contained approximately $2.1 million worth of assets at the time the spouse died in 1998 at a time when the federal estate tax exemption was $600,000.  The trust specified that the assets of the trust were be divided into a pecuniary marital trust and a residuary credit shelter trust.  This was not done by the husband as the executor.  In addition, the marital trust was to be divided into GSTT exempt and non-exempt trusts.  The surviving spouse (decedent herein) had a limited power of appointment over principal from the credit shelter trust to appoint principal to his children, grandchildren or charity.  Decedent made over $1 million in withdrawals from the revocable living trust principal for chartable distributions and claimed charitable deductions on personal return.  The decedent also withdrew other funds for distribution to his children and grandchildren.  At the valuation date for the trust after decedent's death in 2008 (when the exemption was $2 million), the revocable living trust contained over $1 million in assets.  The estate took the position that all withdrawals had been from the marital trust (which were subject to an ascertainable standard) such that the decedent's gross estate value was zero.  IRS claimed that withdrawn amounts were attributable to the credit shelter trust and where included in decedent's gross estate or, in the alternative, were pro rata withdrawals, and asserted an estate tax deficiency of $482,050.80.  The Tax Court determined that charitable gifts were from the credit shelter trust via the decedent's limited power of appointment and the other distributions were from the marital trust as discretionary distributions, and rejected the estate's argument that Treas. Reg. 20.2044-1(d)(3) applied.  The court also determined that decedent's limited power of appointment to appoint to charity from the credit shelter trust was exercisable during life.   The court also noted that distributions from principal could only come from the marital trust.  The value of the decedent's gross estate was determined by subtracting all personal withdrawals from value of remaining trust assets.  Estate of Olsen v. Comr., T.C. Memo. 2014-58.