June 19, 2013

Before the statutory portability provisions were made permanent, people often used Credit Shelter Trusts (“CSTs”) in order to maximize the estate tax exemption of the first spouse to die. The use of CSTs therefore reduces the estate tax on the entire marital estate. As a recent article discusses, however, the need of CSTs has been called into question after portability was made permanent.

The portability provision automatically allows married couples to utilize their combined exemption amount. In 2013, this exemption amount was $10.5 million. For high net-worth families, however, a CST is still a beneficial estate planning tool for saving estate taxes.

It is important to understand that, under portability, a deceased spouse’s exemption freezes at the time of his or her death. Therefore, if the first spouse dies many years before the second spouse dies, he or she could miss significant estate tax savings. CSTs are also beneficial for appreciable assets. The value of any assets placed in a CST is frozen at the time of the spouse’s death. Therefore, if the assets were worth $1 million at the time of the spouse’s death, and $5 million when the surviving spouse dies, all $5 million would be excluded from the estate of the surviving spouse.