Even amongst recent tax law
changes, there are certain estate planning tools that are still good ole’
standbys for your estate plan. You just
have to make sure those sparkly tax law changes don’t blind you from seeing
that old tools, like the credit shelter
trust, can still work.
Before the advent of portability as a method to maximize the
full estate tax exemption available to married couples, such couples would
oftentimes get caught in a marital
deduction trap. In other words, the first spouse to die could pass all
their wealth to the surviving spouse without triggering estate taxes, but upon
the death of the surviving spouse only one spousal exemption (i.e., that of the
surviving spouse) would be available to reduce estate taxes on the couples
combined estate. Under the right circumstances, this was a recipe for disaster.
Enter the credit shelter trust, also known as a bypass trust, which was a way
of avoiding that marital deduction trap. Nevertheless, recent changes to the
federal estate tax laws now allow a decedent spouse to pass their assets and
their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married
couple the power to shelter as much as $10.5 million tax-free.
So, no need for those credit
shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is
still plenty of life left in the this tried-and-true estate tax planning
For starters, many states still
have their own independent estate taxes at much lower levels than the $5.25
million level exempted per spouse under the federal estate tax exemption. More
importantly, portability does not
apply to such taxes. In addition, credit shelter trusts not only shelter assets
from estate taxes, but they can protect an inheritance from the unsuccessful
remarriage of the surviving spouse and general inheritance protection.
While there are myriad trust
arrangements available to help you achieve your specific estate planning goals,
the basic credit shelter trust is a proven tool that should be considered in
the estate planning of every married couple.
Reference: Elder Law Answers
(updated: April 18, 2013) “Credit Shelter Trusts”