Revocable Living Trust and Social Security Benefits - Melvin
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Revocable Living Trust and Social Security Benefits

by Melvin Cook

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T owned and operated a farm. He became entitled to social security benefits. He transferred the assets and property of his farm into a revocable living trust, of which he was the trustee and lifetime beneficiary. His daughter was the remainder beneficiary.

The trust provided that T’s daughter may become T’s successor trustee upon his deathbed, resignation, or incapacity. The trustee was directed to collect, hold, and manage the trust estate and to collect and invest trust income and profits. The trustee was further directed, after paying reasonable expenses, to turn over the net income and principal of the trust to the settlor during his lifetime.

The settlor of a trust is the person who creates the trust. The settlor may also be referred to as the grantor, or the trustor, of the trust.

T reported the farm earnings to the IRS on his taxes as trust earnings. The question arose as to whether his social security benefits were subject to work deductions based on the farm earnings.

The answer was yes. Social Security determined that the farm earnings were self-employment income.

The trust T created allowed him as trustee to retain legal title to the farm and the right as beneficiary of the trust to receive the proceeds from the farm as income for his lifetime. He retained the right to revoke or modify the trust in whole or in part at any time.

A trust is a means of holding property in which the legal title to property is separate from the beneficial enjoyment of the property, or the equitable estate. The beneficiary of a trust is sometimes referred to as the cestui que trust. Thus, where a trust vests sole legal title to trust property and sole equitable title to trust property in the same person, a valid trust does not exist. This is because the legal and equitable title merge and there is not the severance of legal title and beneficial enjoyment that is necessary for a trust.

Ah, but you say, T’s trust did not vest in him sole beneficial enjoyment, or equitable title to the trust property, because his daughter had a remainder interest in the trust. And you would be absolutely right. T’s trust was a valid trust.

But the tax effect of the trust needed to be examined as well. In Helvering v. Clifford, 309 U.S. 31 (1940), the U.S. Supreme Court held that where the settlor had full control of the trust property (the corpus of the trust), the trust was of short duration, and the beneficiary was the settlor’s wife, the settlor was still the owner of such property for income tax purposes, and any income derived from the property needed to be reported on his individual tax return.

Similarly, in Kent v. United States, 60 F. Supp. 203 (Ct. Cl., 1945), a federal court held that where a settlor created a series of trusts which in effect gave him primary control over Trust corpus and income during his lifetime (after a brief retention period), and upon his death gave his property to the natural objects of his bounty (or his heirs who would otherwise have inherited his property upon his death), the trust income was taxable to him individually.

The court reasoned that, while trusts are a venerated legal device that have been used for a variety of legitimate purposes for centuries, there have been occasions on which they have been used with the intent to defeat some public policy. Thus, the court opined that courts need to be astute in looking at the status quo ante (the situation that existed prior to the creation of the trust) to see if there has been any substantial change in ownership after the test is created.

In the instant case, while T’s trust was valid, it was not effective to defeat the public policy purpose behind work deductions from social security benefits. T’s was the sole owner of the farm property and income before he created the trust. He remained in effect the sole owner (at least during his lifetime) after creation of the trust.

Thus it was held that the net farm income since the creation of the trust was net earnings from self-employment for social security purposes.

See Social Security Ruling (SSR) 67-7.

This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.

Contact a Salt Lake City Attorney Committed to Protecting Your Rights

When it comes the family law and social security disability, each client and case is different. It is also important to select an attorney with the experience, skills and professionalism required to address your legal issues. To learn more, contact the Salt Lake City law offices of Melvin A. Cook and schedule an initial consultation to discuss your case.

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