Credit Shelter Trust Planning

New York does not recognize portability* of a deceased spouse’s unused estate tax exemption to the surviving spouse as the Federal law does.

Therefore, certain married couples (even if it is their desire that the surviving spouse enjoy the benefit of the combined wealth until his or her death) may benefit from shielding a portion of the first spouse’s estate from taxation in the estate of the surviving spouse.

This is done through the creation of a trust, effective upon the death of the first spouse, which is to receive a portion of his or her estate and does not qualify for the marital deduction. Assets going into this trust are said to bypass estate taxation in the surviving spouse’s estate, and thus the trust is often referred to as a “bypass trust” or a “credit shelter trust.” Typically, the balance of the estate, after this credit shelter trust is carved out, goes to the surviving spouse (either outright or in trust) and qualifies for the marital deduction.Thus, for certain married couples a failure to plan could lead to the loss of the benefits of one or possibly both of their New York estate tax exemptions.

Example:

• Husband has assets equal to $2,000,000.
• Wife has assets equal to $4,000,000.
• I love you wills. (Everything left to each other outright.)
• Survivor dies in 2018 when the New York exclusion amount is $5,250,000.

Since the surviving spouse’s New York taxable estate will be $6,000,000 ($4,000,000 plus $2,000,000), which exceeds 105% of the 2018 New York exclusion amount ($5,250,000), the New York estate tax imposed upon the surviving spouse’s estate would be $510,800. Neither spouse’s estate benefits from the New York exemption amount.

On the other hand, if the couple’s estate plan contemplates that an amount equal to the New York exclusion amount available on the first death is left in a credit shelter trust for the surviving spouse there would be no New York estate tax imposed upon either spouse’s estate. $510,800 more for the family!

Since New York has not adopted portability, many New Yorkers will still utilize credit shelter trusts as a device to maximize the benefits of both the New York and Federal exemption amounts.

*The American Taxpayer Relief Act of 2012 (ATRA) made permanent the portability of estate tax exemption between spouses. Under portability, if the first spouse to die does not use his or her exemption from estate and gift tax, the executor of the first spouse’s estate may elect to give the use of the remaining exemption amount to the surviving spouse — the so-called deceased spousal unused exemption amount, or DSUE. For decades, the basic estate plan for married couples with assets over the then applicable exemption amount has been the credit shelter trust / marital trust plan. All these plans need to be reviewed. For some, portability will smake sense… for others, credit shelter trust planning will be the better option.