This short blog post follows by March 2, 2015 post and is for those readers who desire a bit more technical discussion. Therefore, keep in mind the tax law and trust rules for creating a defective trust for income tax purposes relative to the person who creates the trust (such as being defective as to the settlor [creator] of the trust) are different than a defective trust for income tax purposes relative to a beneficiary.
There are also design distinctions where the trust is either:
- defective for income tax purposes but not includible later for estate tax purposes [with this design Jane in my previous March 2 post would not get a stepped-up basis for the credit-shelter trust assets at her later death]; or
- defective for income tax purposes and also later includible for estate tax purposes [this is the example in my March 2 post for Jane), or
- not defective for income tax purposes, but later includible in the estate [this is, for example, a DING trust for income tax purposes where the trust is purposely designed to be subject to state tax jurisdictions in a targeted state with no income tax].