Home sale exclusion limited.(IRS rules for living trusts)

More and more individuals are using living trusts to avoid probate court and transfer their property to named beneficiaries upon their death. A new letter ruling exposes a potential problem if a married couple's revocable trust becomes irrevocable after the first spouse dies and the trust then sells the surviving spouse's home.

In letter ruling 200104005, a husband and wife established a revocable living trust and transferred most of their assets to it, including their principal residence. Upon the wife's death, the revocable trust was split into two: (1) a revocable trust funded with the marital deduction amount and (2) an irrevocable trust that received the balance, …