ESTATE-TAX CHANGE AND THE CREDIT SHELTER TRUST

Beware: The estate plan you put in place this year may not work next year. 

Establishing a credit shelter trust (sometimes called a family trust) is a widely accepted and beneficial estate planning strategy. But the changing exemption amount under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) may affect your plans. If you have established a credit shelter trust in your will or through a living trust, there may be unintended results.

Under many estate plans using a credit shelter trust, the first spouse to pass away leaves in the trust the amount of his or her estate-tax exemption. This share of the estate provides income to the surviving spouse and eventually passes to children or other beneficiaries. The balance of the estate usually goes to the surviving spouse, either directly or in trust (sometimes called a marital trust).

Depending on the size of the estate, this plan might make sense when the exclusion amount is $2,000,000 (as it is in 2006-08), but it could have unintended consequences under the Tax Relief Act.

Such a plan may have the effect of leaving more in trust to the children and less outright to the surviving spouse than originally intended. As the estate-tax exemption amount increases from $2 million to $3.5 million between 2006 and 2009, you should consider how much property you want to go into the credit shelter trust and how much you want to go directly to your surviving spouse. As the higher exemption amounts phase in, an estate plan that uses a formula approach may flow a larger amount than you had envisioned into the credit shelter trust and set aside little or no property solely for the surviving spouse.

There are some ways to address this issue, depending on the assets available and how often you would update your plan:

1. You could design your own formula for the credit shelter trust. For example, you could state that the amount to go into the CST should be the lesser of the maximum exemption amount and a specified amount.
2. You could use a Qualified Terminable Interest Trust (QTIP) or a variation of the QTIP strategy known as the Clayton QTIP. Under these arrangements, property is left solely to the benefit of the surviving spouse. The executor or trustee of the estate can make a special election (QTIP election) at the time of the first spouse's death, as to the portion of assets to qualify for credit shelter status versus the marital portion. This provides flexibility by deferring the final decision on the allocation of property until after the death of the first spouse. If properly drafted, a partial QTIP election can be used to optimize tax results with estate planning objectives.
3. Much the same benefit may be achieved by leaving all assets to the surviving spouse and allowing the surviving spouse to disclaim assets. However, one advantage of the QTIP strategy over the use of disclaimers is that the QTIP election can be made up to 15 months after the date of death (if an extension for filing is granted), while disclaimers must be made within 9 months of death.

Under a sunset provision, the changes to the tax laws under the Economic Growth and Tax Relief Reconciliation Act of 2001 are scheduled to expire on December 31, 2010, and do not apply for tax years after this date unless Congress takes further action (under current law, the estate exemption for 2011 will be $1 million). Therefore, it is important to confer with your tax advisor as to the potential impact of the sunset provision on your tax situation. 

Be sure to review your estate plans regularly in light of the changing rules. You should consult with an estate-planning attorney to evaluate your current plans and determine whether you need to make any changes. When it comes to the estate tax, what you don’t know can hurt you.

Email This Page     Printer Friendly Version

This information is provided for informational purpose only. The solutions discussed may not be suitable for your personal situation, even if it is similar to the example presented. Wachovia Securities does not provide legal or tax advice. Please consult with your tax and legal advisors before taking any action that may have tax consequences. Trust services are offered through Wachovia Bank, National Association, a national banking association (chartered by the Office of the Comptroller of the Currency) and a wholly owned subsidiary of Wachovia Corporation.

Wachovia Securities is the trade name used by two separate, registered broker-dealers and non-bank affiliates of Wachovia Corporation providing certain retail securities brokerage services: Wachovia Securities, LLC, Member NYSE/SIPC, and Wachovia Securities Financial Network, LLC, Member FINRA /SIPC.