Why a Credit Shelter Trust is Still a Good Plan

Some estate planners have suggested that portability makes it unnecessary to continue to draft estate plans that include credit shelter trusts. This reported demise of the credit trust reminds me of Mark Twain’s famous observation, after his obituary had been mistakenly published by the New York Journal, that “The reports of my death are greatly exaggerated.” Like Mark Twain’s “death,” it seems to me that reports of the demise of the credit trust are greatly exaggerated.

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

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