Unless the trust follows the IRS requirements, the life tenant )grantor) will have failed to transfer the property to the trust for tax
purposes, and the property will remain in the grantor's gross estate for estate tax
The trust may be perfectly valid for the purpose of transferring property to the trustee for the beneficiary's/ies' use and benefit. But, for estate tax purposes the property remains in the grantor's gross estate.
At this time, because the estate tax exemption is $5,000,000, the error you describe is, for most people, irrelevant. But, if Congress does nothing then on Jan 1, 2013, the exemption returns to $1,000,000, and that could create a difficult estate tax situation for many decedent estates, who have substantial assets.
Hope this helps.
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