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Estate Tax- Credit Shelter Trusts and Marital Trusts

There are some estate planners suggesting that for clients with wealth  that credit shelter trusts and marital trusts are no longer needed because of the portability feature for the federal estate tax exemption of the new tax act effective January 1 of this year. They suggest transferring all assets to the surviving spouse and upon the surviving spouse’s death there would be available both the federal estate tax exemption of the second spouse to die along with the use of the federal estate tax exemption of the first spouse to die. However, regardless of this portability feature of the federal estate tax exemption, we continue to utilize credit shelter trusts and marital trusts for the following reasons.

1. Use of the portable exemption new legislation requires an election that must be made on a timely filed estate tax return of his first spouse to die which computes the amount of unused federal exemption that the surviving spouse will receive. If the election is not made the portable feature is lost. Also, the election is irrevocable. We don’t have this problem with credit shelter trust .

2. If we use the credit shelter trust the appreciation on the assets contained in that trust will not be subject to estate tax on the second spouse to die. Whereas, if the first spouse provides in his or her Last Will that all of his or her assets shall be distributed to the surviving spouse and then the surviving spouse uses the federal estate tax exemption of both the first spouse and the second spouse, all of the appreciation that occurred in the estate of the surviving spouse regarding the assets of the first spouse will be subject to estate tax at the death of the surviving spouse. This results in a large advantage lost.

3. There is no portability with respect to the GST tax. To preserve the GST exemptions for both spouses the deceased spouse must be a transferor and therefore the marital reverse Q-tip trust is needed.

4. Credit shelter trusts provide many nontax benefits such as asset management, creditor protection and guaranteed disposition to lineal descendents.

5. Portability will last for only two years unless it is extended by Congress. If it is not extended then we need redo all the estate plans regarding those that did not utilize a credit trust. Use of the credit trust will avoid this exhausting reconstruction.

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