FUNDING THE CREDIT SHELTER TRUST

By Colleen Cowles

When determining which assets are to be distributed to the credit shelter trust, the following factors should be considered:

Personal preference of the surviving spouse. It may be especially important to the surviving spouse to retain complete control of certain assets, whereas other assets are more conducive to transfer.

If the combined estate of the decedent and the surviving spouse equal or exceed the available credit equivalent, (or you believe it will due to reversion to old law post-2010 or if you believe it will due to future legislative changes) funding the credit shelter trust with appreciating assets will avoid estate tax on values appreciating during the surviving spouse's lifetime. Using growth assets rather than income generating assets to fund the credit shelter trust minimizes amounts taxed at the higher fiduciary rates applicable to the credit shelter. The fiduciary rates can be avoided by passing income to the surviving spouse, but if the spouse doesn't spend that income, that may increase the value of the survivor's estate at the time of his or her death.

If the surviving spouse's estate is less than the credit equivalent and the income generated by the credit shelter assets will be used by the surviving spouse (or gifted during lifetime) to the extent necessary to keep the spouse's taxable estate under the credit equivalent, then income-producing assets may be transferred to the credit shelter trust with income passed through to the surviving spouse to escape higher fiduciary rates.

Keep in mind that only assets owned by the decedent may be used to fund the credit shelter, whether the estate plan includes a disclaimer or mandatory funding. However, assets may be exchanged so desired assets end up in the credit shelter trust. (If double step-up in basis is not achieved upon decedent's death, be aware of capital gains issues prior to any swapping.)

In order to clearly evidence decisions on funding prior to re-titling assets to the credit shelter trust, it is beneficial to complete a memorandum of funding which lists assets to be transferred to the credit shelter. If a disclaimer is applicable, the disclaimer may be used in lieu of the memorandum. The memorandum or disclaimer will save substantial amounts of time spent in reviewing the file to determine which assets are where. The list of credit shelter assets will be extremely helpful to the accountant in filing fiduciary returns or in determining basis issues when an asset is sold in the future.

After final decisions are made regarding assets with which to fund the credit shelter trust, assignments and re-titling must be completed to transfer title to the credit shelter. The tax ID number of the credit shelter trust must be used on the credit shelter assets.

Until the inventory is complete, it is not possible to make decisions regarding which assets to use in funding the credit shelter trust. The inventory is necessary to verify titling of assets, as well as values and beneficiary designations. Additionally, it is important to determine whether any debt is secured by assets since, if assets you desire to place in the credit shelter are used as collateral on debt, either the debt will need to be repaid, assumed by the surviving spouse with other collateral used, or assumed by the credit shelter trust. Review documents to determine requirements of funding formulas. Only when all of those factors are determined can funding formulas or disclaimer options be applied to assets.

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