Credit Shelter Bequests

While the unlimited estate and gift tax marital deductions apply only to the value of property transferred to your spouse, each estate is entitled to a "unified credit" (also known as the "applicable credit amount" or "applicable exclusion amount.)" As a result of this credit, total lifetime gifts and transfers at death up to the applicable exclusion amount are exempt from tax.

Applicable Exclusion Amount
2009	$3,500,000
2010 (opt-out of estate tax)	N/A
2010 (opt-in to estate tax)	$5,000,000
2011	$5,000,000
2012	$5,120,000
2013 and beyond	$5,250,000

The unlimited marital deduction shields the entire value of the estate from tax for the first spouse to die. However, if the surviving spouse does not remarry, then only the amount protected by the application exclusion amount is shield from tax. This can create a significant tax burden on the children; one which could be avoided by advance planning. This is generally accomplished using a credit shelter bequest, which often takes the form of a trust.

However, beginning in 2011, there is an additional option to consider regarding the applicable exclusion amount: passing the amount of the first-to-die to the surviving spouse. The current law provides that estate of a surviving spouse (the second-to-die-spouse) can use any portion of the first-to-die-spouse's applicable exclusion amount. To take advantage of this provision, a special election must be by the predeceased spouse's estate. This election is made on the federal estate tax form (Form 706). Thus, a Form 706 must be filed, even if there is no estate tax due, in order to benefit from this election.

The election to permit the surviving spouse to apply the decedent�s unused exclusion (the deceased spousal unused exclusion amount, or DSUE amount) means that a couple can shelter up to $10 ($5 million for the first spouses applicable exclusion amount and $5 million for the second spouses amount) without any advance planning.

Although, at first glance, it seems this provision eliminates the need for a credit shelter trust, a longer look reveals this is frequently not the case. There are several reasons for the continuing importance of the credit shelter trust:

• State law. While under federal law, the second-to-die spouse can use the remaining exemption amount of the first-to-die spouse, this is not likely to be the case under state law. And, with state estate tax rates as high as 16 percent, why saddle your survivors with a larger than necessary tax bill.
• Remarriage. If the surviving spouse remarries, those who the first-to-die spouse might be left out in the cold. A credit shelter trust is one way to prevent this from happening.

The following example illustrates the value of the credit shelter trust.

Example Moe Millionaire, who is married to Mary A. Millionaire, dies in early 2013 with a federal taxable estate of $9.5 million. His will uses a credit shelter bequest of $5 million to the couple's only child, with the remaining $4.5 million going to Mary. By doing this, Moe uses the marital deduction for a tax free transfer to Mary, who remains well provided for, but also uses the entire unified credit for a tax free transfer of $5 million to their son. Mary died later in 2013. The $4.5 million in her estate transferred tax free to their son because it was less than her applicable exclusion amount. In short, no estate tax liability would be incurred. [Note: If Moe's estate was only $3 Million, he still could have put the entire amount into the credit shelter trust for the benefit of Mary and his son. The spouse can be a beneficiary of a credit shelter trust.] Carryover of Exclusion Amount.The second-to-die spouse can use both his or her exemption amount and any used exemption amount of the first to die spouse, provided the appropriate steps were taken upon the death of the first spouse. Therefore, Moe could have transferred the whole $9.5 million to Mary tax free (because of the marital deduction) Then, upon Mary's death later in 2013 the full $9.5 million could pass to their son free of federal estate tax. Mary's estate could combine Moe's $5 exclusion (since he did not use any of it) with Mary's $5 million exclusion, which is sufficient to shelter the entire amount from tax.

© 2024 Wolters Kluwer. All Rights Reserved.