by Donnie Carpenter on January 23, 2013

ATRA (Part 1) - Estate Planning in a post-ATRA world

With the permanence of portability estate planning may look very different moving forward.  Until now establishing a Credit Shelter Trust (CST), also known as a Bypass Trust, has been a mainstay of modern estate planning. This allowed using up all of the first spouse’s unified credit while still giving full support to the surviving spouse through income off the CST.

Credit Shelter Trust

Portability has made it so filling out a form at the first death preserves any unused credit for the second spouse. So why continue to use the CST, especially considering the fees associated with drafting the trust, and the less generous tax system for trusts.

We there aren’t many situations where a CST will be useful moving forward. The main reason a CST may be a good fit seems to be situations where the growth on the CST is likely to be significant, or where the joint estate is close to or above the combined unified credit exemption equivalent ($10,500,000 in 2013). The reason for this is that when you make your DSUEA to save unused credit for the surviving spouse, the credit amount is locked in, but the assets continue to grow. Now if the assets grow too much faster than the second spouse’s credit amount estate tax may become a problem again. Whereas with the trust the assets are outside of the surviving spouse’s estate, regardless of how they grow, and only what that individual’s assets grow to is a concern.


Here’s an example to make the point:

Scenario 1: Allen and Betty each have $5 million in assets. Allen dies in 2013. Assuming a 6% after-tax rate of return, and that Betty dies 10 years later, each $5 million has grown to over $7,250,000.

CST – If Allen had a CST that passed his $5 million through the estate process and took advantage of most of his credit ($1,945,800 of the $2,045,800 available), then when Betty dies her estate would be a little over $7,250,000, and she would have $100,000 of Allen’s credit, plus her credit that would have grown over 10 years (let’s assume at 2% over 10 years, adjusting the exemption equivalent to the next lowest $250,000 interval) to $2,445,800 (allowing $6,250,000 of assets to transfer untaxed). This would leave her paying estate tax of $300,000 and the heirs receiving $6,950,000 from her and $7,250,000 from the CST for a total of $14,200,000.

Portability – If Allen had not set up a CST, Betty would have had a taxable estate of $14,500,000 with credit available of $4,491,600 ($2,045,800 + $2,445,800). This means her estate tax would be $1,254,200, leaving heirs $13,245,800, a decrease of $954,200. Assuming that the drain from trust income taxes, trust fees and expenses, etc are less than $954,200 then the CST is a better idea for this client.

Scenario 2: Charlie and Debra have $2 million in assets each. Debra dies in 2013. Assuming 6% after-tax return, and that Charlie dies 10 years later, each $2 million has grown to over $3,600,000.

CST – If Debra had a CST that passed her $2 million through the estate process and took advantage of part of her credit ($745,800 of $2,045,800). When Charlie dies his estate would be $3,600,000 with no estate tax. He had available credit of $3,745,800 ($1,300,000 + $2,445,800) or the exclusion equivalent of $9,500,000. So the heirs receive $7,200,000 from Charlie and the CST combined.

Portability – If Debra had not set up a CST, Charlie would have had a taxable estate of $7,200,000 with no estate tax (credit of $4,491,600, exclusion equivalent of $11,364,500). So the heirs still receive $7,200,000; however we have to consider the trust costs associated with the CST, which in this case would have to be $0 to make the CST as good as filing the DSUEA form to use portability.

There are several other issues that may have an impact on the usefulness of CSTs moving forward. If you’re interested in going more in-depth please check out Michael Kitces’s blog where he gives a great discussion of the estate planning impacts of permanent portability.

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