San Antonio Express-News
May 27, 2003

Check Estate Plan to see if Credit Shelter is Obsolete

copyright 2003, Paul Premack

When Congress passed the 2001 Tax Act, they gave themselves a huge pat on the back for repealing the federal estate tax. Within a short time, analysis of the massive tax bill established that the tax was not repealed at all; rather, it was phased out over 10 years and then snapped back to full vigor in 2011.

That’s not to say that the interim phase out is meaningless. Indeed, the exemption from estate taxes was bumped up from $675,000 to $1 million almost overnight. Next year, the exemption gets another boost to $1.5 million. As a result, for the next 7 years fewer and fewer estates are taxable, and more and more families get to keep all the fruits of their ancestors’ labors.

While the tax breaks that come from the increased exemption are automatic, there is not an automatic adjustment to the Wills of a huge group of Americans who set up complex estate plans that were designed to reduce estate taxes. Look for something like this in your own Will: when the first spouse of a married couple dies, a portion of the estate goes to a trust instead of going to the surviving spouse. We call that "by-pass" planning (or you may have heard of it as A-B planning or credit shelter planning).

A credit shelter plan made a huge difference back when the estate tax exclusion was only $675,000. With an $800,000 estate like yours a credit shelter plan saved approximately $47,000 in taxes, and could continue to zero out the estate tax for estates as large as $1.35 million. That was vital before the tax exclusion was expanded in 2001 when the elimination of tax became automatic for an estate like yours.

The complexities of a credit shelter plan are no longer necessary for estates below $1 million. Even so, many people still have Wills that contain the credit shelter plan. So long as it remains in your Will, it might put unnecessary restrictions on your surviving spouse’s control over and benefit from the assets you own.

Thus it is important that you visit your attorney for a review of your estate plan. Perhaps the credit shelter plan can be removed from your Will altogether. That makes your Will shorter, easier to understand, and eliminates the restrictions that your survivor would face if you die with your current Will.

For estates that exceed $1 million, it may be wise to leave the credit shelter plan in place… but to modify it with an on-off provision. If you pass away in a year where the automatic exclusion eliminates the estate tax, the credit shelter would be ignored. But if you die in a year when the automatic exclusion is inadequate, then your credit shelter would be turned on so that the estate tax is still minimized.