Blog Post by Bob Lamm
I had an interesting conversation the other day about whether credit shelter trusts are still needed in light of the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. It was suggested that trusts that split into two, sometimes three, separate trusts in order to preserve a deceased spouse’s estate tax exemption amount are no longer necessary because the Act now allows the executor of the estate to transfer any unused estate and gift tax exemption to the surviving spouse.
From a tax perspective, this is technically correct, as individuals are allowed a $5 million exemption (at least that is the case until January 1, 2013). In the case of a married couple, they will be able to combine the two for a total of $10 million whether or not they draft any type of trust at all!
So, this means that credit shelter trusts are no longer needed, right? Well, not really. First, the continuing ability of the executor to transfer any unused exemption is not guaranteed. We are not really sure what is going to happen after that, as the Act has an expiration date of December 31, 2012. Second, and more important, I think that sometimes estate planning practitioners and their clients too often let the tax tail wag the dog. At the end of the day, a key goal of any estate plan is to make sure that the client’s estate is distributed to the persons that they intended. Most of the time, those persons are their children and their grandchildren. However, in the absence of an irrevocable credit shelter trust that is established at the death of one spouse, the survivor would be able to amend the entire trust and, at their death, leave it to anyone. This includes leaving the estate to a new and sometimes significantly younger spouse!
The resulting conflict that will ensue is the topic of another blog. Needless to say, there are going to be some very unhappy people involved not to mention the dissatisfaction of the deceased who would no doubt be rolling in their grave if they knew that their children and/or their grandchildren would be completely disinherited.