A HOUSE DIVIDED: THE PURCHASE BY THE SURVIVING SPOUSE OF AN INTEREST IN THE FAMILY RESIDENCE FOLLOWING ITS ALLOCATION TO A CREDIT TRUST
By James P. Lamping, Esq.*
Following the death of the first spouse, the allocation of the family residence in a two trust division can present unique challenges for the trustee.1 Commonly, the value of the residence exceeds one half of the value of the community trust estate to be divided. However, it is generally disadvantageous to the surviving spouse for even a fractional share of the residence to be held by a credit trust.
One solution to this dilemma is for the surviving spouse to buy back the share that has been allocated to the credit trust. While this technique can be effective and is frequently used in practice, certain issues should be considered before completing this transaction. In particular, the trustee of the credit trust may be confronted with tensions between their fiduciary duties to the remainder beneficiaries and the desire to permit the surviving spouse to purchase the residence. There is also some concern regarding the income tax consequences of this transaction. This article will examine this common scenario, and analyze the practical considerations the trustee may wish to take into account before taking action.