A Proposal to Make Credit Shelter Trusts Obsolete
26 Pages Posted: 3 Aug 2014
Date Written: August 1, 1997
Since the introduction of the unified credit in 1976, married couples who attempt to minimize transfer taxes and maximize the wealth passing to their heirs have generally been plagued by an expensive and burdensome exercise. In order for each spouse to optimize the use of this or her unified credit under the Code and to promote the economic well-being of the surviving spouse, the last will and testament of each spouse, using technical formulas and special terms of art, must establish a testamentary trust for the benefit of the surviving spouse. Known in tax parlance as credit shelter or bypass trusts, these trusts, if properly structured, are intended to shield the assets of the first decedent spouse from inclusion in the gross estate of the surviving spouse.
In the situation of a first marriage and in the absence of marital strife, most married couples would prefer to orchestrate their testamentary affairs in a far simpler fashion than having to establish a credit shelter trust, i.e., by having each spouse leave his or her assets outright to the surviving spouse. But the imposition of the federal estate tax and the nontransferability of the unified credit to the surviving spouse frustrates testamentary plans for those married couples with taxable estates: it forces such taxpayers, in their attempt to minimize federal estate taxes, to establish credit shelter trust, with all of their concomitant complexities and expenses.
This analysis first provides a history of credit shelter trusts and summarizes their central role in many estate plans. Next, applying standards of equity, administrative efficiency, and neutrality, this analysis evaluates the current use of credit shelter trusts. This analysis concludes that, in the spirit of treating married taxpayers as single unit for estate and gift tax purposes (a principal goal of the Economic Recovery Tax Act of 1981), the unified credit should be transformed into an exemption transferable to the surviving spouse. Adoption of this proposal would generally lead to the elimination of credit shelter trusts, simplify the entire estate planning process, reduce the costs associated with the administration of a taxpayer's estate, and, at a practical level, relieve the surviving spouse of the stress and anxiety associated with not being in direct control of the deceased spouse's assets.
JEL Classification: K34
Suggested Citation: Suggested Citation