When estate tax exemption portability was made permanent in 2013, many married couples thought they no longer needed credit shelter trusts. After all, the primary purpose of such trusts was, historically, to preserve both spouses’ estate tax exemptions. But credit shelter trusts still offer significant benefits that portability doesn’t, especially for high-net-worth couples.

Limitations of Portability

Portability has a couple of significant limitations:

1. It isn’t recognized in all states and doesn’t apply to the generation-skipping transfer (GST) tax. Additional planning may still be needed for state and GST tax purposes.
2. It’s available for only the most recently deceased spouse. If a surviving spouse remarries and also survives the subsequent spouse, any portability of the previous spouse’s exemption will be lost.

In addition, portability must be elected on a properly filed estate tax return — even if no tax is due.

Benefits of a Credit Shelter Trust

A credit shelter trust can address these issues and provide other valuable benefits, such as creditor protection. But perhaps the most valuable benefit for high-net-worth couples is the ability to protect future appreciation from estate tax.

Here’s an example: Mike and Karen’s combined estates equal double the 2014 exemption amount, or $10.68 million. Mike dies in 2014, and, under his estate plan, his $5.34 million in assets transfers to a credit shelter trust benefiting first Karen and then the couple’s children.

Karen limits her trust distributions to trust income. By the time she dies, the trust principal has grown by almost 50%, to $8 million. Her other assets also have grown and will use up her own exemption amount. Nevertheless, the entire trust balance of $8 million transfers to the children tax-free. Why? Because Mike’s exemption protects the entire trust, regardless of how large it grows.

If instead the couple had depended on portability, the $2.6 million of appreciation would be subject to estate tax. Assuming the current 40% rate applied, this would be $1.04 million.

Please contact us if you’d like more information on credit shelter trusts and how they might help you achieve your estate planning goals.