Posted by: Woodfork Law | February 23, 2013

Is a Credit Shelter Trust necessary?

Under estate tax law, each person presently receives a $5,250,000.00 estate tax exemption. Basically, this means that if everything in your estate at the time of your passing is less than 5.25 million dollars, you will not have to pay estate taxes.  For married couples, both the husband and the wife each get the 5.25 million dollar exemption.  However, before 2010, when the first spouse passed, they would loose their exemption.

For years, estate planning attorneys got around this problem by creating what is called a “Credit Shelter Trust.” This Trust goes by a few different names such as a “Bypass Trust,” or an “A/B Trust,”  In a nutshell, the purpose of creating the Credit Shelter Trust was to preserve the spouse who passed first’s tax exemption.  As a result, when the second spouse passed, both spouses tax exemptions could be used to pass gifts to heirs tax free.

Presently, under the 2010 Tax Relief Act provisions for portability, the use of the Credit Shelter trust may not be necessary.  Now, after the first spouse passes, his or her tax exemption may be go directly to the surviving spouse.  Portability arrives at the same result as the Credit Shelter trust without the hassle.

Although “Portability” seems extremely beneficial, there are some issues. For example, if the survivor remarries, he or she loses the deceased’s exclusion amount.  Also, if you elect portability, the exclusion is locked in, and not indexed for inflation.  Additionally, portability will not provide the same protection against the surviving spouse’s creditors and future ex-spouses as would the credit shelter trust.  Thus, even with the benefits of portability, if estate taxes are a concern for you, you should sit down with a lawyer to decide if portability is best for you.


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