REASONS TO USE A CREDIT TRUST

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REASONS TO USE A CREDIT TRUST

Posted On : Nov-11-2011 | seen (583) times | Article Word Count : 615 |

A Credit Trust is established in the will or living trust of a married couple. The surviving spouse is typically the beneficiary. This trust is often used as an estate tax tool by utilizing the federal estate tax credit of the first spouse to die; however, it is also a valuable asset protection tool.

The 2010 Tax Act introduced “portability” of the estate tax exemption between spouses, which allows a surviving spouse to use his/her spouse’s unused exemption. For example, each spouse has a $5M exemption and the first spouse used $2M on his/her death, the unused $3M (so $8M) will be available at the second spouse’s death. Seattle Tax Attorneys must consider whether this renders Credit Trusts obsolete.

A Credit Trust is established in the will or living trust of a married couple. The surviving spouse is typically the beneficiary. This trust is often used as an estate tax tool by utilizing the federal estate tax credit of the first spouse to die; however, it is also a valuable asset protection tool.

While portability is the new thing, there are very important reasons to still use a Credit Trust instead:

1. Creditor Protection. One of the best and main reasons to utilize a Credit Trust is to protect assets from creditors, second spouses, etc. There is no such protection when relying on portability. For example, if the second spouse, after the first spouse dies, is found liable for millions of dollars from a car accident the assets place in the Credit Trust will be shielded whereas money/assets held personally (which would be the case under portability) would be subject to that liability.

2. Post Death Asset Appreciation. The value of the Credit Trust’s assets will be “frozen” and any future appreciation of those assets will escape estate taxes. Seattle Tax Attorneys advise that with portability, if the $2M from the above example grows to $6M before the second spouse dies that $4M increase is subject to estate tax whereas under a Credit Trust it will not be subject to estate tax. Also, note that a credit trust is sheltered from GST taxes but that is not the case with portability.

3. Certainty. A Credit Trust guarantees who the remainder interest will pass to (e.g. children of a prior marriage). Portability allows the second spouse complete discretion over all of the assets, which means if the surviving spouse remarries and is the first to die in that marriage all the assets could be lost to that new spouse.

4. State Law Problems. There is no comparable state portability exemption. In Washington, where there is a combined community estate greater than $2M, the current $2M Washington state tax exemption will be partially or wholly lost on the first death unless a Credit Trust is used. Losing this exemption can result in higher Washington state estate taxes on the death of the second spouse.

5. Other Issues. With portability the executor must file an estate tax return with a proper election when the first spouse dies even if there would otherwise be no such return required. If the election is not timely made, the exemption is lost. Further, making this election will provide the IRS with additional time, past the regular statute of limitations, to review the gift and estate tax returns of first spouse to die to determine the proper amount of unused exclusion. This opens the second estate to possible large audit costs and possible taxes due to assets being revalued in the first estate. Also, if the surviving spouse remarries much, if not all, of the portability from his or her first spouse will be lost. Seattle Tax Attorneys counsel that all of these present additional expenses and traps for the unwary.

Darin T. Jensen is a Seattle Tax Attorney with the firm Lasher Holzapfel Sperry & Ebberson PLLC.

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<h1>REASONS TO USE A CREDIT TRUST</h1> Author: <a href='http://www.articleseen.com/profile_Charles Drouin.aspx'>Charles Drouin</a> The 2010 Tax Act introduced “portability” of the estate tax exemption between spouses, which allows a surviving spouse to use his/her spouse’s unused exemption. For example, each spouse has a $5M exemption and the first spouse used $2M on his/her death, the unused $3M (so $8M) will be available at the second spouse’s death. Seattle Tax Attorneys must consider whether this renders Credit Trusts obsolete.

A Credit Trust is established in the will or living trust of a married couple.  The surviving spouse is typically the beneficiary.  This trust is often used as an estate tax tool by utilizing the federal estate tax credit of the first spouse to die; however, it is also a valuable asset protection tool.

While portability is the new thing, there are very important reasons to still use a Credit Trust instead:

1.	Creditor Protection.  One of the best and main reasons to utilize a Credit Trust is to protect assets from creditors, second spouses, etc.  There is no such protection when relying on portability.  For example, if the second spouse, after the first spouse dies, is found liable for millions of dollars from a car accident the assets place in the Credit Trust will be shielded whereas money/assets held personally (which would be the case under portability) would be subject to that liability.

2.	Post Death Asset Appreciation.  The value of the Credit Trust’s assets will be “frozen” and any future appreciation of those assets will escape estate taxes.  Seattle Tax Attorneys advise that with portability, if the $2M from the above example grows to $6M before the second spouse dies that $4M increase is subject to estate tax whereas under a Credit Trust it will not be subject to estate tax.  Also, note that a credit trust is sheltered from GST taxes but that is not the case with portability.

3.	Certainty.  A Credit Trust guarantees who the remainder interest will pass to (e.g. children of a prior marriage).  Portability allows the second spouse complete discretion over all of the assets, which means if the surviving spouse remarries and is the first to die in that marriage all the assets could be lost to that new spouse.

4.	State Law Problems.  There is no comparable state portability exemption.  In Washington, where there is a combined community estate greater than $2M, the current $2M Washington state tax exemption will be partially or wholly lost on the first death unless a Credit Trust is used.  Losing this exemption can result in higher Washington state estate taxes on the death of the second spouse.

5.	Other Issues.  With portability the executor must file an estate tax return with a proper election when the first spouse dies even if there would otherwise be no such return required.  If the election is not timely made, the exemption is lost.  Further, making this election will provide the IRS with additional time, past the regular statute of limitations, to review the gift and estate tax returns of first spouse to die to determine the proper amount of unused exclusion.  This opens the second estate to possible large audit costs and possible taxes due to assets being revalued in the first estate.  Also, if the surviving spouse remarries much, if not all, of the portability from his or her first spouse will be lost.  Seattle Tax Attorneys counsel that all of these present additional expenses and traps for the unwary.

Darin T. Jensen is a Seattle Tax Attorney with the firm Lasher Holzapfel Sperry & Ebberson PLLC.About the Author: The Lasher firm’s Seattle Lawyers and <a rel="nofollow" href="http://www.lasher.com/practice-areas-detail/corporate-business-law">Seattle Tax Attorneys</a> can assist you in LLCs formation and bankruptcy planning and representation, collection of debts and other business entities. Please contact Jeff Smoot at (206) 654-2411, if you have any questions about this article. Article Source: <a href='http://www.articleseen.com/Article_REASONS-TO-USE-A-CREDIT-TRUST_103308.aspx'> http://www.articleseen.com/Article_REASONS TO USE A CREDIT TRUST_103308.aspx</a>

Article Source : http://www.articleseen.com/Article_REASONS TO USE A CREDIT TRUST_103308.aspx

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The Lasher firm’s Seattle Lawyers and Seattle Tax Attorneys can assist you in LLCs formation and bankruptcy planning and representation, collection of debts and other business entities. Please contact Jeff Smoot at (206) 654-2411, if you have any questions about this article.

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