Transfers Through Medium of Trust
Transfers through the medium of a trust require looking through the trust to determine the beneficial owner of the property. For example, a transfer to a revocable trust that becomes irrevocable on the death of the deceased spouse or registered domestic partner will be excluded under the trust exclusion in Rev & T C §62(d) and the interspousal transfer exclusion in Rev & T C §63 or domestic partner transfer exclusion in Rev & T C §62(p)–(q) if the surviving spouse or partner enjoys the exclusive right to trust income, regardless of the trustee’s power to distribute principal. Property also will be transferred to the spouse or partner to the extent that the spouse or partner has a power of appointment over trust principal.
NOTE: The power of the trustee to distribute principal among spouse and issue does not destroy the interspousal transfer exclusion because issue do not share a present interest with the income beneficiary; the issue’s interest is a “mere expectancy.” See Estate of Johnson (1961) 198 CA2d 503, 510; Estate of Canfield (1947) 80 CA2d 443, 451.
If the trustee has the power to sprinkle income to the surviving spouse or registered domestic partner and issue, the trust may not qualify if “issue” includes grandchildren who have at least one living parent, but the trust will qualify under the interspousal or domestic partner and parent-child exclusions if the sprinkle power is limited to the spouse or partner and children. 18 Cal Code Regs §462.160(b)(1).
Notice: If you are concerned about property tax increases following the death of the first spouse, when taxes could create a material financial burden, and the bypass trust will own real property, the surviving spouse should have the sole income interest in the bypass trust. This objective is inconsistent with the federal transfer tax planning goal of minimizing the survivor’s estate by granting the trustee a “sprinkle” power over income. To reconcile this goal, consider allocating the real property to the QTIP trust.