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Financial Planning > Trusts and Estates > Estate Planning

New Estate Planning Strategies for a Post-Portability World

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The past three years have ushered in a new era in estate planning, significantly simplifying matters for middle- and higher-income clients alike. However, there may be many of these clients who have continued to rely upon their outdated, pre-2013 estate plans—a situation which could easily lead to adverse tax consequences down the road.

Whether this inaction is a result of procrastination or lack of knowledge, revisiting the pre-2013 estate plan can prove to be especially beneficial for higher-income clients as new techniques and strategies have emerged to help these clients take advantage of the new rules in order to minimize both estate and income tax liability. 

Blindly relying upon the old credit shelter trust strategy should no longer be acceptable, as newly emerging strategies can produce dramatic tax savings in addition to much needed flexibility.

The Pre-2013 Credit Shelter Trust

Prior to the advent of portability (the system that now allows a surviving spouse to automatically use the deceased spouse’s estate tax exemption), credit shelter trusts were used by married couples to fully use their two estate tax exemptions. A portion of the deceased spouse’s assets equal to the estate tax exemption amount would be placed into a trust created for the benefit of the surviving spouse.  The remaining assets (in excess of the deceased spouse’s exemption) would pass outright to the surviving spouse.

Because the surviving spouse did not technically own the assets held in the trust, those assets would pass estate tax-free to his or her heirs. The assets that the surviving spouse owned outside of the trust would also pass estate-tax-free to the extent their value did not exceed the exemption amount.

For most clients, a credit shelter trust is no longer necessary for estate tax purposes because of the permanently higher federal estate tax exemption that now applies ($5.45 million in 2016).  Unfortunately, many clients may not realize that the value of the assets (their tax basis) is essentially frozen at the time they are placed in the credit shelter trust—meaning that if those assets appreciate in value, they may create an unwelcome income tax hit for the eventual heirs.

On the other hand, if the assets were left outright to the surviving spouse, they would receive a step up in basis upon the surviving spouse’s death, so that if the asset value has appreciated, capital gains taxes will be minimized.

A Modified Disclaimer Strategy

Unlike a credit shelter trust strategy, a disclaimer strategy can provide flexibility to a surviving spouse because it allows a spouse to evaluate his or her financial circumstances and the tax rules as they actually exist at the time of the deceased spouse’s death. To use this strategy, a client simply leaves all assets to the surviving spouse outright, but then gives the survivor the option of disclaiming those assets.

If the spouse chooses to disclaim the assets, they will simply pass into a bypass trust established for his or her benefit. This can be particularly useful if the surviving spouse resides in a state with its own estate or inheritance tax—because the state exemption levels can be much lower than the generous federal exemption. 

The bypass trust can also be useful from an asset protection standpoint—whether the surviving spouse is concerned about creditors’ claims or perhaps a new spouse that could come into play later in life.

The potentially high income taxes that may apply to the trust itself should also be taken into consideration when determining whether the trust strategy maximizes value—unless the trust income is distributed, the trust’s income tax rate reaches the highest levels at a much lower level of income than would be the case if the client owned income-producing assets outright.

In any event, the disclaimer strategy allows the surviving spouse to evaluate the situation when the situation has become relevant, rather than relying upon a strategy that was possibly put into place years before.


While the credit shelter trust may still have its uses, in this age of high federal estate tax exemption levels, those uses need to be reevaluated, taking the potential income tax consequences into consideration when determining whether the credit shelter trust strategy continues to be ideal.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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