Probate & Trust Law Section Conference Manual ... - Minnesota CLE

predeceases the second spouse. Consider this simple example from the Joint Committee
Report:
Example 3.−Assume the same facts as in Examples 1 and 2, 28 except that Wife
predeceases Husband 2. Following Husband 1’s death, Wife’s applicable
exclusion amount is $7 million (her $5 million basic exclusion amount plus $2
million deceased spousal unused exclusion amount from Husband 1). Wife made
no taxable transfers and has a taxable estate of $3 million. An election is made
on Wife's estate tax return to permit Husband 2 to use Wife's deceased spousal
unused exclusion amount, which is $4 million (Wife's $7 million applicable
exclusion amount less her $3 million taxable estate). Under the provision,
Husband 2's applicable exclusion amount is increased by $4 million, i.e., the
amount of deceased spousal unused exclusion amount of Wife.
In effect, then, Husband 2 ends up being the beneficiary of Husband 1’s unused exclusion
amount, even though there is no privity at all between Husband 2 and Husband 1.
9. In Defense of Credit Shelter Trusts
Earlier in these materials, the case is made for using the portability election in lieu of a
credit shelter trust. But the following benefits of the traditional credit shelter trust should not
be overlooked:
• Any assets placed in a credit shelter trust will not be subject to federal estate tax upon
the surviving spouse’s death no matter how much they grow in value. 29 Suppose, for instance,
Husband dies today and his executor puts $5 million into a credit shelter trust with the balance
going outright to Wife. The trust assets grow to $21 million by the time Wife dies in 2025.
None of the trust assets is included in Wife’s gross estate, so her executor is free to use her $5
million exclusion (as adjusted for inflation) on Wife’s own stuff. If there were no credit shelter
trust, alas, Wife would have a $10 million exemption but tax would due on at least $11 million
of the assets that would have passed without any tax at all. One must still have something like
a credit shelter trust to protect future appreciation from tax upon the death of the surviving
spouse. (Note too that unlike the “basic exclusion amount,” the DSUE Amount is not indexed
for inflation—so even modest appreciation due to inflation needs a credit shelter trust.)
• Credit shelter trusts are often used to make sure at least some assets pass to the lineal
descendants of the first spouse to die upon the death of the surviving spouse. The trust often
provides for discretionary distributions of income and principal pursuant to an ascertainable
28 Remember that the prior examples assumed these basis facts: Husband 1 dies in 2011 having used $3 million of
his $5 million applicable exclusion amount. Husband 1’s executor makes a timely portability, so Wife has an
applicable exclusion amount of $7 million. Wife then marries Husband 2.
29 Remember when assets used to appreciate?
30