As discussed in a previous article, due to higher estate tax exemption, certain trusts previously established for purposes of avoiding estate taxes under the estate plan of a predeceased spouse may no longer be necessary in light of the new federal estate tax law.
The 2012 Tax Relief Act provides an exemption from federal estate tax of $5,250,000. This exemption of $5,250,000 results in a great number of credit shelter trusts (CSTs) no longer being necessary to avoid federal estate tax on the death of the surviving spouse. These credit shelter trusts are often called the Family Trust, Credit Shelter Trust or By Pass Trust. Historically on the death of the first spouse, it was common to establish a CST for the surviving spouse and perhaps also for other members of the family equal to the estate tax exclusion amount which we have included in the chart below.
Year of Death Estate Tax
Exclusion Amount 1977 $120,667 1978 $134,000 1979 $147,333 1980 $161,563 1981 $175,625 1982 $225,000 1983 $275,000 1984 $325,000 1985 $400,000 1986 $500,000 1987 – 1997 $600,000 1998 $625,000 1999 $650,000 2000 & 2001 $675,000 2002 & 2003 $1 million 2004 & 2005 $1.5 million 2006 – 2008 $2 million 2009 $3.5 million 2010 $5 million 2011 $5 million 2012 $5.12 million 2013 $5.25 million
The CST would utilize the estate tax exclusion amount of the first spouse to die and would not be subject to estate tax on the death of the surviving spouse. As stated above, a surviving spouse is entitled to an exemption in 2013 of $5,250,000. If the assets owned by the surviving spouse plus the surviving spouse’s share of the assets of the CST are less than $5,250,000 at the death of the surviving spouse, the CST is no longer necessary to avoid estate taxes on the death of the surviving spouse, although there may be other valid reasons to keep such a trust in effect.
North Carolina law allows a CST to be terminated. The court may terminate a CST upon consent of all the beneficiaries of the CST if it is determined that the continuation of the CST is not necessary to achieve its original purpose. If one or more beneficiaries do not agree with the proposed termination, the court may still terminate the CST if the termination of the trust will adequately protect the non-consenting beneficiary.
For example, the husband passed away in 1987 and his estate planning documents established a CST equal to the estate tax exclusion amount in 1987 of $600,000 for the benefit of his wife for her lifetime and remainder at her death to their children in equal shares. The CST now has a value of $1,000,000. The wife has assets in her individual name of $1,500,000. The wife is eighty years of age. The CST may be terminated with the wife and children taking their actuarially determined shares without gift tax consequences. The wife’s share of the CST would be $93,650 and the children’s share of the CST would be the balance of $906,350. The value of the wife’s estate for estate tax purposes would be $1,593,650 ($1,500,000 + $93,650) that is well below her estate tax exclusion amount of $5,250,000. Also termination of the CST eliminates future Trustee fees, trust administration expenses, accountings and income tax returns.
In summary, a CST may now be terminated. If the surviving spouse’s share of the CST and his or her individual assets will not exceed $5,250,000 at the time of the surviving spouse’s death, the CST is no longer necessary to save estate taxes in the estate.
Craig Dalton, an attorney no longer with Poyner Spruill, was the original author of this article.