In an action that affects Massachusetts residents and citizens all across the country, Congress passed the American Tax Relief Act of 2012. Included in that law are provisions for transfer taxes or taxes on an estate.
Under the new tax law, credit shelter trusts will still be a part of many estate plans, but they will be used differently. Prior to ATRA, the transfer tax laws included an exclusion amount that was not subject to estate tax. That amount was fixed at $5,000,000 in 2011 and adjusted each year for inflation. Frequently, a trust was set up so that when a person passes away, the estate passed into a trust and sheltered the amount from taxes for both the original owner and the heirs. The beneficiaries of the trust were usually the spouse and children.
Most often credit shelter trusts were in a person's will or revocable trust, and the funds were generally taken from the person's estate. To take full advantage of the credit shelter trust, it was important that each spouse hold assets in his or her own name to fund the trust upon his or her death. Many jointly owned assets may not be used to fund a credit shelter trust.
Under ATRA, the use of the credit shelter trust will change, and estate tax planning may become more complicated. Because the rules governing tax-exempt assets may be subject to change as legislation comes into effect, consulting with an attorney may be an effective way to ensure that a person's current estate planning paperwork is up-to-date. Legal counsel may also help ensure that the estate is set up in a way that maximizes its value to the family.
Source: Forbes, "Planning for Married Couples After ATRA -- Part I", Lewis Saret, March 18, 2014