It’s Time to Rethink Your Credit Shelter Trust


To minimize estate taxes, it’s crucial that you keep your estate planning up to date. If you established a credit shelter trust, bypass trust, or AB trust before 2011, it’s time to take a second look. Changes in the law have likely rendered much of your prior planning obsolete, if not outright dysfunctional.

Trusts can provide creditor protection while allowing for the control and management of assets beyond death. Many trusts have been set up as credit shelter trusts, with the intent that they would receive and hold assets from the first spouse upon their death. This preserved the estate tax exemption, which would have been lost if all assets had passed directly to the surviving spouse. The estate can continue to grow tax-free, for the benefit of the surviving spouse and children.

Unfortunately, the credit shelter trust is extremely complex, and in many cases is no longer necessary. In 2013, new legislation made this type of estate plan obsolete for most married couples. The current law allows transfers of as much as $5.43 million, and the surviving spouse can claim the deceased’s estate tax exemption via an election on the estate tax return. Portability allows the surviving spouse to use tax benefits the deceased failed to, in addition to their own estate tax exemption. This eliminates the need to divide assets between the spouses in order to fund trusts individually. A married couple can leave up to $10.86 million free of estate taxes, without the need to separate assets to fund AB trusts.

The greatest risk created by credit shelter trusts may be the creation of capital gains tax liability. While assets receive a step-up in basis after the first spouse’s death, those assets funding a credit shelter or bypass trust won’t be stepped up again upon the second spouse’s death. This means that any appreciation of these assets will be subject to capital gains taxes when sold by heirs after the surviving spouse’s death.

If you have a credit shelter trust in order to minimize your estate taxes, now is a great time to reassess your plans. An estate plan providing for the outright distribution of assets to the surviving spouse – coupled with the power of the portability provision – can achieve the same estate tax relief without generating capital gains tax liability.

At Werba Rubin, we’re committed to helping you preserve your wealth, plan for the future and achieve your wealth management goals. Contact us today for a comprehensive financial analysis centered around your estate planning needs.

The information herein is general in nature and should not be considered insurance, legal or tax advice.  Please consult with an insurance, legal or tax professional for additional information on specific situations.     

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Investment advisory services provided by Werba Rubin Wealth Management, LLC (“Werba Rubin”). WR 16-019  Securities transactions are offered through a non-affiliated entity, Loring Ward Securities Inc., member FINRA/SIPC.


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