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

after the first spouse’s death), the extent to which the first spouse to die is confident that the
surviving spouse will make sure to provide for beneficiaries of the first spouse to die, and the
extent to which the first spouse to die wants to provide for other beneficiaries during the
surviving spouse’s lifetime.
But another factor that may weigh against the use of a trust is the applicability of the
39.6% income tax rate and the 3.8% tax net investment income where undistributed taxable
income exceeds $11,950 (the inflation‐adjusted figure for 2013). Trusts may also pose
additional administrative costs.
If creditors are a concern, part of asset preservation must include “asset protection”
(our euphemism for planning to keep assets out of the evil talons of creditors). In that case,
planning with trusts will be nearly essential. 10 Planners can continue to recommend lifetime
credit shelter (or QTIP) trusts, whereby one spouse creates an irrevocable spendthrift trust for
the benefit of the other spouse. The thinking is that the assets of such a trust would be immune
from the creditors of either spouse.
Finally, it’s worth remembering that many states have their own estate taxes, and the
exclusion amounts tend to be lower than $5.25 million. Although a couple may not require
federal estate tax planning, state estate tax planning may require the use of techniques
normally reserved for those with taxable estates.
COUPLES WITH ESTATES ABOVE $5.25 MILLION BUT BELOW $10.5 MILLION
For these couples, the chief estate tax issue is whether to use a credit shelter trust or
the portability election upon the death of the first spouse. At first blush, portability may seem
much easier than (and thus preferable to) a credit shelter trust, as it can be implemented
simply through an “I love you” will leaving the entire estate outright to the surviving spouse
followed by a timely portability election by the first spouse to die’s executor. There are other
situations where relying on the portability election may be preferable to a credit shelter trust:
• Neither the decedent nor the surviving spouse has children from outside the marriage.
• The complexities and costs of trust administration outweigh the benefits to all parties,
as the surviving spouse is competent to manage assets.
• The step‐up in basis for income tax purposes matters more than shifting future
appreciation on assets left outright to the surviving spouse.
10 Spouses can also achieve creditor protection in some states by holding property as tenants by the entirety, and
spouses in many states can rely on homestead exemptions for limited creditor protection.
11