How Portability May Affect Your Credit Shelter Trust

When a person dies, a federal estate tax exemption shields his assets from estate taxes. Until recently however, married couples were only able to use one of their two potential exemption amounts unless they had a certain type of estate plan in trust. This typically involved a trust known as a credit shelter trust. Recent changes in tax laws now allow spouses to utilize portability to preserve the exemption for both spouses. Portability allows the surviving spouse to utilize, upon his death, any available exemption amount that the first spouse did not use.

Reasons to Keep Your Credit Shelter Trust

If you created an estate plan prior to the introduction of portability, you may be wondering if you should modify your plan. While your trusts may benefit from updates, there are still valid reasons for keeping a credit shelter trust. These reasons include:

  1. If a significant amount of time passes between the death of the first spouse and the death of the second spouse, the assets in the second spouse’s estate could grow substantially. The opportunity to utilize a credit shelter trust, however, will have been lost.
  2. The value of the assets placed in a credit shelter trust is frozen at the time the first spouse dies. This means that if the assets continue to appreciate over time, the appreciated value of the assets is still shielded from estate tax. It is possible that the assets could appreciate to the point where they exceed the amount allowed by the federal estate tax exemption, meaning that relying on portability would not be as effective for avoiding the tax.
  3. If the client faces any state level estate tax, portability may not be an option.
  4. Credit shelter trusts still provide many non-tax related benefits that relying on portability alone cannot accomplish.

Understanding when trust modifications are necessary is important in order to ensure that your estate plan accomplishes your goals. To learn how we have helped clients keep their estate plans up to date, view our client testimonial page today.