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Have a Credit Shelter Trust? If so, it’s time to review your estate plan.

Changes in tax legislation may cause adverse income tax consequences for heirs if a current estate plan provides for the establishment of a “Credit Shelter Trust” at the first spouse’s death.  Prior to the change in law, a Credit Shelter Trust was a good estate planning option and was designed to minimize onerous estate taxes at the second spouse’s death.

The Tax Cuts and Jobs Act of 2017 increased the estate tax exemption to $11,200,000 per spouse (or $22,400,000 per couple!) for decedent’s dying in 2019. Thus, today the vast majority of people no longer need complicated plans containing Credit Shelter Trusts or Generation Skipping Trusts in order to avoid or minimize estate taxes for their heirs.  

In fact, these older outdated plans may actually cause increased income taxes for the heirs after the second spouse’s death.  The reason for this has to do with tax basis of assets.  Assets owned by a decedent receive an adjusted or “stepped-up” basis equal to fair market value at the owner’s death.  But, assets held in a Credit Shelter Trust do not receive another adjustment to basis at the second spouse’s later death.  This can cause significantly higher capital gains tax after the second spouse’s death when the heirs or trustee may need to liquidate assets held in the Credit Shelter Trust.  Unnecessary Credit Shelter Trusts provide no estate tax savings, increase administrative costs, and require annual tax returns for the life of the surviving spouse. 

Fortunately, the solution to this problem is a revision to estate planning documents.  If you have questions about this topic, please consult your attorney regarding the specifics of your situation, or contact Greg Shelley, chair of the Estate and Wealth Transfer Group of Bose McKinney & Evans LLP, at 317-684-5250 or gshelley@boselaw.com.