Haimo Law - Wills, Trusts, Probate, Business Planning and Asset Protection

Do We Still Need Credit Shelter Trusts?

Do We Still Need Credit Shelter Trusts?


Estate planning consists of basic planning and complex planning. On one hand, the goal of basic planning is to avoid probate and guardianship, ensure a large element of control over the transfer of property to your beneficiaries and preserve and protect your beneficiaries’ interests in that property. On the other hand, the goal of complex planning is to insulate and isolate assets from creditors, as well as minimize income, estate, gift and generation-skipping transfer taxes that will be incurred upon death and beyond.

In prior years, the amount of assets that you had to own to trigger estate and gift tax liability fluctuated between $1,000,000 and $5,000,000, or double that if married. Traditional planning techniques included, and still include, use of credit shelter trusts to preserve the unlimited marital deduction, sales to defective grantor trusts to freeze the value of assets that are gifted, funding grantor retained annuity trusts, leveraging qualified personal residence trusts and capitalizing on minority and lack of marketability discounts.

Historically, each spouse would encapsulate an amount equal to the exemption in a trust for the benefit of one’s spouse and children. It was appropriately named a “credit shelter trust”. It was formulaic and therefore offered flexibility so the plan changed with the laws. The laws are said to be “permanent” (as of Jan 1, 2013 that is), the estate and gift tax exemption is $5,250,000 for each spouse.  now, but unfortunately, there is no such thing in the tax code as permanent. The tax laws are subject to the political winds. It’s no surprise they change as often as our presidents.

As mentioned above, today the estate and gift tax exemption is $5,250,000 for each spouse. The law also made a feature called portability “permanent”. Portability means that the unlimited marital deduction is automatic, thus eliminating the need for  credit shelter trust planning. This is not entirely the case, however, because the surviving spouse must still timely make an election to take advantage of the portability. In any case, portability helps, but credit shelter trusts still prove to be very important for purposes of control and asset protection. The bottom line is that putting property in trust protects beneficiaries’ interests from themselves, if financially irresponsible, from their spouses and from their creditors. While credit shelter trusts have lost some of their appeal, trusts remain very important estate planning and asset protection vehicles.