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Finding Tax Shelter in Estate Planning - Shield assets with a credit shelter trust

Who are the beneficiaries of your estate? For many entrepreneurs, it is typically a combination of a spouse and children. However, part of the net worth you intend to pass to your loved ones could be eroded by estate taxes. Fortunately, you may be able to shelter your estate from tax through a "credit shelter trust" (also called a "bypass trust"). Background: Thanks to the unlimited marital deduction, any transfer of assets from one spouse to another is completely exempt from federal estate tax. Furthermore, for decedents dying in 2008, up to $2 million of assets can be effectively sheltered through the credit known as the estate-tax exemption. This exemption amount increases to $3.5 million for 2009. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax is scheduled to be eliminated after 2009, but it is then scheduled to be reinstated in 2011. By using a credit shelter trust, you may transfer a sizable amount to your heirs by combining the marital deduction with the federal estate-tax exemption. Example: William Marx, a successful business person, owns assets currently valued at $4 million. Under his will, all of the property is to be transferred to Susan, his spouse. Assuming that William dies in 2008, the assets pass to Susan free of estate tax under the unlimited marital deduction. But the exemption for William's estate goes to waste. For instance, should Susan die in 2009, the exemption for her estate can shelter $3.5 million. The remaining $500,000 (adjusted for investment performance) is subject to estate tax. Possible solution: William could leave half of his estate, or $2 million, to Susan outright and transfer the other half to a credit shelter trust. For instance, this can be accomplished by establishing the trust in his will (i.e., a testamentary trust). There are two common methods: *The will can provide that the income from the trust is to be distributed among the surviving spouse and children. *If there is concern about a surviving spouse's financial security, trust income can be paid to the spouse for life. Going back to our example, the $2 million transferred to the trust is sheltered by the estate-tax exemption for William's estate. It bypasses Susan's estate completely. And when Susan dies, there is no estate tax on the $2 million she leaves to the children. Net effect: With the credit shelter trust, $4 million is transferred estate-tax-free. Reminder: Of course, you must consider other factors- including the application of state inheritance laws-as part of an overall estate plan. It is recommended that you seek assistance from an estate-tax practitioner.

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