Husband and wife, both 71 years old at the date of her death, have at the date of her death $3,100,000 in assets and no debt.  In addition to these assets there is another piece of property that is the subject of this question.  They purchased a home on the central coast of California (the beach house) which is now worth $1,200,000.  In 1989 they transferred this property to an irrevocable trust.  The husband and wife are trustors, but not trustees of this trust.

A part of the trust document is titled “Trust Terms During the Lifetime of Trustors”.

The document says in part, that the trustors “during their lifetimes, and the survivor of them during his or her lifetime, shall have the right at all times to occupy and use said beach house, rent free; provided however, that said turstors or the survivor of them shall pay all property taxes, assessments, fees, charges, and other expenses for the maintenance and protection of the said property, including but not limited to insurance, utilities, repairs and maintenance thereof.”  These rights are personal and not transferable.

The beach house is an older home and the burden of maintenance has been substantial.  For instance the trustors have paid for removing and replacing rotted lumber in large areas.

The next paragraph of the agreement says that if they don’t pay the expenses, they lose the right to use the property.

The trustors do not have the power to deal with the title, or manage or control, or to receive proceeds from any rental, mortgage or sale of the property.   The trustors had and the survivor has the right to “abandon and forever surrender the use” of the beach house.

I could easily argue that this situation fits within the broad scope of IRC 2036 and one half the value of the beach house should be included in the wife’s estate. 

I could also easily argue that this is not a retained interest subject to IRC 2036 and is nothing more that a rental agreement.  Although the rent at times may be lower than expected, it could also be higher do to the responsibility for maintenance of the property.  One year the maintenance was over $25,000 and that by itself far exceeded the market value rent.  The statement in the trust that the trustors get the use of the property “rent free” is completely negated by their obligations to pay other expenses.  As a rental agreement none of the value would be included in the wife’s estate.

I would sincerely appreciate any advice or comments on this issue.