My second read of the “Fiscal Cliff Bill” raises the interesting question concerning the Credit-Shelter Trust. For decades people getting their estate plans done have utilized a vehicle known as the Marital Bypass Trust; the A-B Trust; the Credit-Shelter Trust or some other name which means that the husband and wife each create their own Revocable Living Trust. Upon the demise of the first to die, a Trust is created for the benefit of the children to use up that individuals exclusion amount with the remaining going to the surviving spouse. Or some similar version of this.
In 2010, when Congress dealt with a two year extension of the Economic Growth and Tax Relief Reconciliation Act of 2001, they added portability. Estate planning attorneys had a difficult time recommending a client’s plan for portability since the provision had a two year life span with the automatic sunset/expiration at the end of December of 2012. What has been referred to as the “Fiscal Cliff Bill” turned those provisions permanent. Therefore, we now have provisions allowing estate planners to plan accordingly.
Portability means that, when there is a married couple and the first spouse dies and fails to use up his or her full exclusion amount (this year that is $5.25 million), that amount is transferred to the benefit of the surviving spouse. So, in short, a married couple will be allowed a lifetime exclusion amount of $10.5 million, whether or not they pass together. This, therefore, eliminates the tax based need for a Credit-Shelter Trust as mentioned above.
Before we declare the demise of the Credit-Shelter Trust, we should first look at some non-tax purposes that this vehicle has. This is why many estate planners refer to a Credit-Shelter Trust as a “Family Trust”, quite frankly with the permanent portability mentioned above, it is no longer appropriate to refer to it as a Credit-Shelter Trust, so we will use the phrase “Family Trust” for the remainder of this discussion. A Family Trust is an excellent vehicle to do many non-tax things, such as: 1. Assuring those assets cannot be squandered by the surviving spouse or the surviving spouse’s new mate;
2. It can help protect the assets from creditors of the beneficiaries;
3. It can help protect the assets from subsequent divorce proceedings of the beneficiaries;
4. Assures that the assets in the Family Trust are distributed according to the specific wishes of the first spouse to pass; 5. Allows distribution to the beneficiaries of a first dying spouse while allowing the surviving spouse to receive income while he or she is still alive;
6. To freeze the value of certain assets outside of the estate of the surviving spouse to avoid the inclusion of future appreciation; 7. Avoids administrative complications;
8. Is useful in a blended family scenario;
So, while the Family Trust may no longer be as useful in the tax scenario, it has many possible uses for non-tax estate planning needs.
With the lessening of the Credit-Shelter Trust, we may also find an increase in the use of Joint Trusts for families. Depending on the non-tax needs of the estate plan, I expect to see many more estate planners using Joint Trusts because one of the reasons for doing separate Marital Trusts was to take advantage of the Credit-Shelter provisions that are eliminated with portability.
Therefore, I do not believe that the permanency of portability requires all those with Marital Bypass Trusts to rush to their attorneys to get them redone. However, when you are creating an estate plan or having your current estate plan reviewed, I encourage you to have these issues discussed.