Funding the Credit Shelter Trust:
Considerations on Which Assets to Use

When determining which assets are to be distributed to the credit shelter trust upon decedent's death, 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 surviving spouse's estate equals or exceeds the available unified credit equivalent (taking into consideration any lifetime gifts which may have reduced the credit equivalent), funding the credit shelter trust with appreciating assets will avoid estate tax on appreciation occurring during the surviving spouse's lifetime. If the appreciating assets are retained by the surviving spouse, they will increase the surviving spouse's taxable estate. Using growth assets, rather than income assets, to fund the credit shelter trust minimizes amounts taxed at the higher fiduciary rates applicable to the credit shelter trust.
• If the surviving spouse's estate is less than the unified credit equivalent and the income generated by the credit shelter assets will be used by the surviving spouse 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.
• Determine if any debt is secured by assets since, if the collateral is used to fund the credit shelter trust, either the debt will need to be paid, assumed by the surviving spouse with other collateral used, or assumed by the credit shelter trust.
• Generally, it is best to retain IRA and other qualified assets outside of the credit shelter trust, so required distributions don't deplete credit shelter trust values and increase the value of the surviving spouse's taxable estate. Keeping qualified assets outside of the credit shelter also leaves maximum flexibility and simplicity in regard to rollover and other IRA specific issues. However, in estates where substantially all assets are qualified assets, it is possible to utilize these assets in funding the credit shelter.
• It is typically most beneficial for the surviving spouse to retain the personal residence outside of the credit shelter trust to preserve the capital gains exclusion on sale of the personal residence. If other assets are not sufficient to fund the credit shelter, the personal residence may be used in funding the credit shelter, particularly if double step-up has increased the basis in the home significantly. However, appreciation from decedent's date of death through the surviving spouse's lifetime will be subject to capital gains tax if held in the credit shelter trust. Additionally, if the home is used in funding the credit shelter trust, other liquid assets should be transferred to the credit shelter for use in paying taxes and any other tax deductible expenses related to the home to preserve those deductions. If the credit shelter trust owns the home and expenses are paid personally by the surviving spouse, those deductions are jeopardized.
• 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 retitling 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 trust. 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 retitling must be completed to transfer title to the credit shelter trust. The tax ID number of the credit shelter trust must be used on the credit shelter trust 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. Only when all of those factors are determined can funding formulas or disclaimer options be applied to assets.

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