Power to Sell: Can a surviving spouse sell assets out of an irrevocable Trust?

In this video, partner Keith A. Davidson discusses whether a surviving spouse can sell assets from an irrevocable Trust.

The following is a transcript of this video:

In this video, I’m discussing can a surviving spouse sell an asset for an irrevocable trust. So this will be a scenario where the first spouse has died and the second spouse might be trustee of something like a bypass trust, or a marital trust, that has become irrevocable, but the surviving spouse is the trustee of that trust and probably the beneficiary. And the short answer is yes. A surviving spouse can sell assets from an irrevocable trust. But, here’s the catch: One the asset is sold, the proceeds from the sale must be held in an account in the name of that same trust. So just because the trustee, the surviving spouse, has the right to sell an asset, such as a home or a business or stock, that doesn’t mean that he or she can just pocket the cash. That cash then has to be held in an account that is in the name of that trust. So if you have a bypass trust, and it owns a commercial piece of real property, the surviving spouse, if they’re trustee, can sell that commercial property. And let’s say they get two million dollars of net proceeds after the sale, well that two million would have to go into a bank account in the name of the bypass trust. Or, it would have to be transferred into some sort of a brokerage account where maybe it could be prudently invested. But, the money has to stay with the trust.
So selling the asset isn’t so much the issue, it’s where do the proceeds go. It still belongs to that irrevocable trust. And the only way it’s going to come out of that irrevocable trust is if the trustee is making distributions according to whatever the distribution requirements of that trust are. So if the surviving spouse, for example, is entitled to income from a bypass trust, but nothing else, than that’s all that that surviving spouse can take and then the rest will stay in the trust until the surviving spouse dies. And then, typically, it would go down to the children, if that’s who the remainder beneficiaries of the bypass trust are. So, it just depends on the trust terms. You’ve got to watch the trust terms. But, most trustees and most trust situations certainly have the right to sell assets. But that doesn’t mean that they have the right to take the sales proceeds for themselves. You’ve got to look at the trust document to determine what their distribution rights might be.