November 3, 2014

Credit shelter trusts have a history of popular use with married couples because at its basis, this trust protects assets up to the federal estate tax and gift tax exclusion in order to be taxed under the first spouse’s estate. When that spouse passes away, the assets stay in the trust in order to benefit the surviving spouse. When the second spouse passes away, the assets are not taxed because they are protected under the unlimited marital deduction. Without the use of this credit shelter trust, the gift and estate tax credits for the first spouse wouldn’t benefit the other spouse, leaving the second spouse’s assets subject to higher tax on death.

This concept is known as portability and it was made permanent through the American Taxpayer Relief Act of 2012. For those married couples with smaller or medium sized estates, credit shelter trusts can still be a valuable asset.

There are several distinct benefits to this concept of portability. To start with, it makes planning easier for married couples. There’s no real added steps that the couple has to take in order to take advantage of portability. There’s no need to create testamentary trusts when portability is accomplished. Doing this also eliminates the need for considering major tax consequences of which spouse dies first.

Credit shelter trusts are also relatively easy to administer. The surviving spouse retains control over the assets and the executor doesn’t have to consider the best approach to to trust funding. It’s important to note, though, that tax returns still need to be filed in order for the portability to be protected for the survivor.

Finally, beneficiaries can take advantage of a second basis step-up when the second spouse passes away. Assets inside the trust don’t get included in the survivor’s estate. This step up in basis can add a lot of value if there are appreciable assets inside the trust like real estate or businesses. This is because of the high rates associated with capital gains taxes as well as  the net investment income tax.

For more information about setting up a credit shelter trust for your family, contact Shah & Associates at 732-521-9455.