The Wall Street Journal Complete Estate-Planning Guidebook by Rachel Emma Silverman

Author:Rachel Emma Silverman [Silverman, Rachel Emma]
Language: eng
Format: epub
ISBN: 978-0-307-46128-5
Publisher: Crown
Published: 2011-09-06T00:00:00+00:00

TRUSTS FOR SPOUSES: CREDIT SHELTER TRUSTS

In recent years, some of the most common types of irrevocable trusts were those designed for married couples to maximize their individual estate tax exemptions. Married couples, as you know, can pass on their wealth to each other estate-tax free. But when the surviving spouse dies, estate tax comes due. Until recently, without advanced planning, the couple could not always take advantage of both individual’s estate-tax exemptions.

Here’s where a special trust came in, often called either a “credit shelter” trust or a “bypass” trust. A typical credit shelter trust calls for the amount of the current maximum estate-tax exemption—$5 million in 2011—to go into the trust upon the first spouse’s death. The surviving spouse would get distributions from the trust during her lifetime, and upon her death the rest of the trust’s assets would ultimately go to the kids or other heirs, depending on the trust’s instructions.

Upon the surviving spouse’s death, the couple’s kids would inherit money left over in the trust plus up to $5 million in the surviving spouse’s estate, free of all estate tax.

Now, under the new tax laws, portability means that if you’re married, your unused estate-tax exemption can be passed onto your spouse after your death. (I discussed portability in Chapter Two.) So, given portability, why still bother with a credit shelter trust?

Estate planners say there are several reasons why this vehicle is still useful, especially for couples with assets that are likely to exceed either the federal or state estate tax exemptions.

First of all, a credit shelter trust shields any appreciation of the assets placed in the trust from estate tax. So let’s say you put in shares of stock worth $5 million into the trust and they rise significantly in value. All that appreciation is now out of your estate. (The downside, though, is that the assets left in the trust won’t get a step-up in basis upon your death, which could mean greater capital gains taxes for your heirs. If the assets were left directly to your spouse, they would be stepped up to full market value upon your death.)

Leaving money in a credit shelter trust, rather than outright to your spouse or other heirs, can also protect assets from creditors. In addition, if your spouse remarries after your death, a credit shelter trust can help ensure that the remaining money goes to your kids, rather than to your spouse’s new family. A credit shelter trust may also shield assets from being counted against Medicaid if your surviving spouse needs to go into a nursing home. Credit shelter trusts can be used to shield generation-skipping taxes, which are not portable. You can do this by making grandchildren beneficiaries of the trust and applying your GST exemption. And they can be used to protect both spouses’ state estate tax exemptions, which, unlike the federal estate tax exemption, are not portable, at least as of this writing.

If you already have a credit shelter or bypass trust in your plan, talk to your lawyer about whether it’s still appropriate for you, given the tax law changes.

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