Supercharged Credit Shelter Trust

Many married individuals adopt an estate plan designed to avoid estate tax on the death of the first spouse to die while taking maximum advantage of the so-called unified credit (also known as the applicable exclusion amount). The plan typically involves setting apart the amount sheltered by the unified credit (the credit shelter amount) separately and providing that only the portion of the estate in excess of the credit shelter amount will pass in a manner that qualifies for the marital deduction. Frequently, the credit shelter amount is set apart in trust so that the surviving spouse may benefit from the property if needed without causing those assets to be included in the surviving spouse\u27s estate for estate tax purposes. A credit shelter trust not only preserves the unified credit of the first spouse to die but also provides an opportunity to leverage the unified credit of the first spouse to die during the lifetime of the surviving spouse: to the extent there is appreciation and/or accumulated income in the trust, it passes on the surviving spouse\u27s death free of estate tax (and free of generation-skipping transfer tax, assuming an allocation of GST exemption to the trust). The amount in the trust passing tax-free at the surviving spouse\u27s death is enhanced, of course, if trust distributions to the surviving spouse are minimized. The amount in the trust would be further enhanced if the credit shelter trust were the surviving spouse\u27s grantor trust: the surviving spouse\u27s payment of tax on the trust\u27s income would permit the trust estate to grow income tax free. The trust, in other words, would be supercharged. This article will suggest that a lifetime QTIP trust should be used to supercharge the credit shelter trust. Given the advantage offered by the Supercharged Credit Shelter Trust, practitioners may wish to consider adopting this drafting approach in many cases