Are Estate Plans Involving Trusts And Other Sophisticated Techniques Necessary Now That The Federal Estate Exemption Is $5 Million?

Until recently, estate planners have typically created estate plans by using a number of sophisticated planning techniques. One common technique involved the creation of a testamentary credit shelter trust in the Last Will and Testament of the spouse who dies first. A credit shelter trust is a trust for the benefit of the spouse, or for the benefit of the spouse and issue, which shelters the amount exempt from estate taxes from being included in the surviving spouse’s estate, while keeping the assets available for the spouse if he/she ever needs them. By doing so, the assets in the credit shelter trust usually pass to beneficiaries free of estate taxes upon the death of the surviving spouse when the credit shelter trust terminates. By creating a credit shelter trust, estate planners were able to preserve the exemption available to the first spouse to die, which would be lost if that spouse left all of the assets he/she owned at the time of death to the surviving spouse. After creating shelter shelter trusts, estate planners usually advised the couple to transfer assets in order to equalize their estates so each spouse owned sufficient assets to fund their testamentary trusts upon their deaths.

The new law recently enacted by Congress, called the “The American Taxpayer Relief Act,“ has brought an extraordinary change to the estate planning environment. The law made permanent the substantial increase in the amount exempt from federal estate taxation, allowing the first $5 million per person and $10 million per couple to pass to heirs free of federal estate taxes. In addition, the new law made the portion of the estate tax exemption remaining unused at the death of the first spouse portable. That is, the new law allows the executor of a deceased spouse’s estate to transfer any of the $5 million tax exemption that is not used after the death of the first spouse to the surviving spouse without the need for a credit shelter trust or other sophisticated planning techniques. Given these extraordinary changes to the estate tax code, do any compelling reasons remain for clients with “modest” estates of under $5 million to continue to utilize traditional estate planning techniques that involve the creation of  Wills with testamentary credit shelter trusts and require equalization of the estate between husband and wife?

The answer, I believe, is “Yes.” Some reasons to create a testamentary credit shelter trust in a Will even though the amount exempt from federal estate taxes has now permanently increased to $5 million per person and portability is the rule follow:

1. To provide for someone other than the spouse to manage the money.

2. To provide for someone other than the spouse to decide on how much to distribute to the spouse.

3. To protect against the surviving spouse’s potential creditors, including future spouses if the surviving spouse remarries.

4. To protect against a Medicaid lien substantially reducing the estate if the surviving spouse ends up in a nursing home.

5. To save state income taxes (if the credit shelter trust would not be subject to state income taxes but the spouse would be.)

6. To preserve the amount exempt from State estate taxes from being taxed in the estate of the surviving spouse (for use in those States, like New Jersey, that impose a State estate tax, separate from the federal estate tax, on the estates of deceased State residents.)

7. To protect assets when the spouse of a non-US citizen dies while leaving significant assets to the non-citizen survivor (through the use of a Qualified Domestic Trust.)

8. To freeze appreciation of assets in the credit shelter trust rather than exercising portability (where it would be preferable to do so in some cases involving appreciating assets.)

9. To ensure distribution of the first deceased spouse’s share of the estate to his or her issue from a prior marriage after the death of the surviving spouse in second marriage situations.