Funding A Credit Shelter Trust

Many of our clients who are married have joint revocable trusts that include instructions for the possible division of the trust upon the first spouse’s death.  The purpose of the division of the trust into two separate trusts upon the first spouse’s death is primarily estate tax reduction.  Sometimes these types of trusts are called “A-B trusts,” “2 trusts,” “credit shelter trusts,” and “exemption trusts.”   More recent clients may have trusts known as “disclaimer A-B” or “disclaimer 2 trust” and these trusts would also fit within the topic of this article.

Most planners feel that we currently have a disappearing opportunity to engage in lifetime gifting in excess of $1 Million.  In 2011, the lifetime Gift Tax exclusion amount for each person was increased to $5 Million.  For 2012, this amount was adjusted for inflation and is now $5,120,000.  This amount will change back to $1 Million in 2013 unless Congress enacts a change prior to December 31 of this year.

One strategy for utilizing this higher gift tax exemption that people have been receptive to is to utilize the “exemption” or “credit shelter” that already exists in one of the trust types described in the first paragraph, and to make a completed gift into this type of trust for the benefit of a spouse.  Both spouses can accomplish this, but careful attention will be required to be sure that these credit shelter trusts funded with gifts are not treated as reciprocal trusts by the IRS.

Some clients find the idea of making large gifts difficult since they are usually gifting these funds to children or grandchildren and the client essentially loses the ability to control or enjoy the property that has been gifted.  Gifting to a spouse, however, might be more easily tolerated than a substantial gift to children or grandchildren.  Aside from the dynamics of whether it is easier to gift to a spouse or successive generations, gifting is a powerful estate tax reduction technique.  The funding of a credit shelter trust is just one of many ideas that our firm can assist you with.  Please call your attorney to discuss gifting techniques or for more information on funding a credit shelter trust for your spouse.