We met with a married couple to review their estate plan that had been documented in the 1990s. Their plan included a Credit Shelter Trust as one of the provisions in their Living Trust.
A Credit Shelter Trust provision is a very common Estate Tax minimization technique that sometimes is known as an “A/B Trust,” a “Credit Shelter Trust,” a “Bypass Trust,” or even some other names. But the purpose is the same. On the first death among the couple, a certain amount of the assets are placed in the Credit Shelter Trust. If appropriate rules are followed, the assets in the Credit Shelter Trust are not included in the taxable estate of the surviving spouse. The initial purpose of most Credit Shelter Trust provisions was to minimize Estate Taxes.
Estate Tax Laws Have Changed
Over the last 30 years, the threshold for imposition of Estate Taxes has dramatically changed. For example, in the early 1990s, estates over $600,000 were subject to Estate Taxes. Twenty years later, in 2018, Estate Taxes apply only to estates in excess of $11,180,000. Many couples who documented their estate plans prior to 2012 included a Credit Shelter Trust because of the Estate Tax consequences in effect at that time. Many of those couples no longer have an Estate Tax issue, at least under current law.
The Dilemma is Whether the Credit Shelter Trust Should Continue as a Part of the Estate Plan
There can still be valid reasons for a Credit Shelter Trust to be put in place on the first death.
1. The beneficiaries are determined. The beneficiaries of the Credit Shelter Trust are determined as of the death of the first to die. While the surviving spouse might be able to make some modifications to the amounts or the timing of the gifts to the children of the first to die, the identity of those beneficiaries will remain the same. In other words, the surviving spouse can’t change the beneficiary of the Credit Shelter Trust to a new spouse or children of a subsequent marriage. The surviving spouse can change the beneficiary of the assets not included in the Credit Shelter Trust.
2. Assets in the Credit Shelter Trust are not subject to claims of creditors incurred by the surviving spouse after the first death. If the surviving spouse engages in a business venture that fails, or if he or she spends all of his or her funds not in the Credit Shelter Trust, the funds in the Credit Shelter Trust are not subject to creditors of the surviving spouse if those debts are incurred after the first death.
3. Appreciation of the assets in the Credit Shelter Trust also escapes Estate Taxation on the second death. A new concept of “portability” can provide some Estate Tax savings, but it does not extend to appreciation of the assets.
4. The Estate Tax law could change. If the amount subject to Estate Tax were significantly reduced, the opportunity to minimize Estate Tax might be lost if not created prior the first death.
Alternatively, there can be reasons to amend the Estate Plan to abandon Credit Shelter Trust and allow the surviving spouse to own the assets and have complete flexibility.
1. Any assets that are intended to be held until the death of both spouses will receive an increase in basis on the second death. If any of those assets had been in a Credit Shelter Trust, they would have received an increase in basis on the first death, but not on the second. Therefore, there can be some Income Tax Savings for the next generation of the assets to be simply inherited by the surviving spouse, and then receive a step up in basis on the second death.
2. Administration is easier. If the estate plan provides for a Credit Shelter Trust, after the first death, assets must be allocated between the Credit Shelter Trust and the surviving spouse assets. The assets should be properly identified and a separate Income Tax Return for the Credit Shelter Trust should be filed. These are relatively minor intrusions compared to significant Estate Tax savings, but might not be worthwhile if there is no Estate Tax savings. On the other hand, if not Credit Shelter Trust is utilized, that allocation need not be done as the assets are treated as assets of the surviving spouse.
Please consult with a qualified attorney to discuss the issue.
The information provided above is general in nature, and should not be construed as legal advice applied to a specific situation. Please discuss the facts of your situation with a qualified professional.