Implementing credit shelter trusts today: Why a trustee must choose carefully. Today’s trust and estate administration landscape looks vastly different than it did just a few years ago. Recent changes to federal estate and tax laws mean that far fewer people face a potential estate tax. Traditionally, couples that faced a potential tax utilized special trusts to ensure that they were able to maximize each spouse’s federal estate tax exemption amount. These trusts are often referred to as credit shelter or bypass trusts. Within them, sub-trusts are created after the first spouse passes away. One sub-trust, the marital trust, does not preserve the estate tax exemption of the first spouse. Another sub-trust, the credit shelter trust, does preserve the estate tax exemption but does so at the possible expense of other forms of taxes. While today’s trusts often utilize similar techniques, in many cases, they give more flexibility to the successor trustee at the time the first spouse passes away.
With this flexibility comes significant responsibility. Today’s trusts often give the successor trustee the ability to decide which assets should be placed in the marital trust and which should go into the credit shelter trust after the first spouse passes away. Such decisions may have substantial tax, creditor, and other consequences that the trustee must weigh carefully.
Weighing the Options Is a Must
Why must the trustee make careful considerations as to which assets should be placed in which trusts after the first spouse passes away? Following are three examples:
- If all of assets are placed in the marital trust and the size of the estate grows above and beyond the federal estate tax exemption amount, an estate tax will be due nine months after the death of the surviving spouse.
- If the assets decline in value, from what they were worth when the first spouse died to when the second spouse dies, the tax basis in those assets will decrease as well. If the assets had been held in the credit shelter trust, they would have preserved the basis that existed at the time the first spouse died.
- If the goal of the couple was to support beneficiaries, in addition to the surviving spouse, their options may be more limited when assets are placed in the marital trust. The income earned on assets held in that trust can only be used for the surviving spouse. Assets held in the credit shelter trust can be used for the spouse and other beneficiaries.
As you implement an estate plan, it is vital to seek the guidance of an experienced and knowledgeable estate administration attorney who can help you make these important decisions.
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