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Credit Shelter Trusts Continued

By Howard C. Stross
December 16, 2013

Have you ever dealt with someone who tells you what they think you need without discussing what you want? They assume their solution is correct so they do not counsel you as to any other options. The federal estate tax exemption is increasing to $5,340,000 in 2014 so some estate planning attorneys assume that credit shelter trusts are no longer needed. These attorneys declare that their married clients don’t need to leave property to the survivor in a trust, because those clients will never have an estate tax problem. However, that assumes the only reason for leaving property to a surviving spouse in trust is federal estate tax planning.

Last month we started a discussion on credit shelter trusts. The first blog of this series presented three non-tax life risks that clients may want a credit shelter trust to protect against:

  • Catastrophic illness costs
  • Unexpected creditors
  • Assets going to someone else’s family if he or she remarries

Let’s look at three options for how married clients can leave their estate to their spouse and evaluate how these options address these life issues and federal estate taxes.

Option 1: Leave Everything to Your Surviving Spouse Outright

You may decide to leave everything outright to your spouse. This is what married clients usually do if it is a first marriage or if they are not concerned about leaving money to children from a prior marriage. It is easy to leave everything to your spouse outright, but this does not protect against either life risks or possible estate taxes.

A spouse can protect their spouse from three life risks by leaving property in a trust for the survivor. One fear that clients may have is that the survivor will have to give up control if the assets are in a trust. There are ways to alleviate this concern. The survivor could be the trustee, or co-trustee with power to remove and choose their co-trustee. Once they see that flexibility can be built into a trust, married couples become very interested in trust options for their estate plan.

Option 2: Marital Deduction Trust

A marital deduction trust is a trust which qualifies for the estate tax unlimited marital deduction. The surviving spouse must be the only beneficiary of this trust during their life, and the trustee must distribute any income the trust earns to the surviving spouse. This trust will be subject to federal estate taxes on the surviving spouse’s death. Also, a surviving spouse’s creditors can use the income distribution requirement to demand that the income be paid to them (minimizing the life risk protection.)

Option 3: Credit Shelter Trust

What if the trust did not require distributions, but left this in the control of the trustee? Such a trust may have greater life risk protection than the marital deduction trust, and may also avoid federal estate tax on the survivor’s death. This is a credit shelter trust!

If clients pick Option 3, when the first spouse dies it is not difficult to have the trustee distribute the property to the surviving spouse. If clients choose Option 1, it is almost impossible to create a protective trust for the survivor. The credit shelter trust is not just for estate tax minimization, but for the greatest balance of flexibility in an uncertain future.

The only thing that is certain about the future is that it will change. You need an estate plan to work at an unknown time, for unknown laws, for unknown assets, for an unknown family situation, and for unknown goals. Sounds like a daunting task, doesn’t it? We have a program that shifts the work of reviews and updates to our staff, includes education for you and your family and offers other benefits. Stross Law Firm offers an estate planning maintenance program, Peace Of Mind A Life Plan for Everyone, so your estate plan evolves as conditions change in the future.

Currently, one objection to credit shelter trust planning is the possibility of additional capital gains taxes on the surviving spouse’s death. The third article in this series will show you a strategy to minimize that risk.

This article is not intended to provide legal advice or encourage anyone to do estate planning without the guidance of an experienced estate planning attorney. Call us at 813-852-6500 to schedule a free 30-minute consultation with an estate planning lawyer.

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