Michigan Estate Planning Blog

Credit Shelter Trusts – The Tried and True Tool Saginaw, Michigan

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) when they appear to be eclipsed by changes in the tax laws. For the prudent taxpayers, however, old standbys like the credit shelter trust should not be swept aside. Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the couples combined estate. Under the right circumstances, this was a recipe for disaster. Enter the credit shelter trust, also known as a bypass trust, which was a way of avoiding that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free. So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach. For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and general inheritance protection. While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in the estate planning of every married couple.

Reference: Elder Law Answers
(updated: April 18, 2013) “Credit Shelter Trusts”

For more information, see www.jerryreiflawyer.com

 

Credit Shelter Trusts – The Tried and True Tool Saginaw, Michigan

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) when they appear to be eclipsed by changes in the tax laws. For the prudent taxpayers, however, old standbys like the credit shelter trust should not be swept aside. Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the couples combined estate. Under the right circumstances, this was a recipe for disaster. Enter the credit shelter trust, also known as a bypass trust, which was a way of avoiding that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free. So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach. For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and general inheritance protection. While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in the estate planning of every married couple.

Reference: Elder Law Answers
(updated: April 18, 2013) “Credit Shelter Trusts”

For more information, see www.jerryreiflawyer.com

Credit Shelter Trust Still A Valuable Estate Planning Strategy

One of the most-heralded simplifications of the new estate tax law is portability of the individual’s federal estate tax exemption between married persons. Some media “experts” have been saying that portability would eliminate the need for most estate planning. Not true. As pointed out recently in the Journal of Financial Planning, credit shelter trusts are still a savvy planning strategy. Portability means that any unused portion of a deceased spouse’s estate tax exemption doesn’t simply dissipate but can go automatically to the surviving spouse. Each individual gets a $5 million exemption, which means a married couple can effectively protect up to $10 million with their combined exemptions. That amount is sufficient to protect the vast majority of estates, eliminating the need for a credit shelter trust to pass and protect the exemption of the first spouse to die. Or so it would seem. There are two conditions that limit the effectiveness of portability. The first is obvious: portability will expire at the end of 2012, unless Congress acts to preserve it. The second is that the surviving spouse must file a timely estate tax return in order for the IRS to assess and transfer the exemption, even if the estate value wouldn’t have otherwise triggered an estate tax return. So this simple, automatic portability thing is not as simple, nor as automatic as many would like believe. Moreover, portability as a technique lacks many estate planning advantages, especially in the cases of blended families, appreciating assets, or where sprinkling taxable income to beneficiaries in lower brackets could result in a net tax savings. Lastly, remember that portability will sunset for people dying on or after January 1, 2013. Relying on portability will be effective only in those situations in which both spouses die prior to that date. In most situations, a properly planned credit shelter trust will offer significant advantages over reliance on automatic portability.

Reference: The Journal of Financial Planning (August 2011 ed.) “Why Portability Isn’t a Cure-All