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) in Overland Park and elsewhere, when they appear to be eclipsed by changes in the tax laws.
Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples oftentimes would 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 combined estate of the couple.
Under the right circumstances (and there were many), this was a recipe for disaster.
Enter the credit shelter trust, also known as a "bypass trust," was a proven means to avoid 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 traditional 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 provide 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 tool that should be considered while planning the estate of every married couple.
Remember: When making your financial, tax and estate plans, don't go it alone. Be sure to engage competent professional counsel.
Reference: Elder Law Answers (updated: April 18, 2013) “Credit Shelter Trusts”