Boosting your estate planning power: How to “supercharge” a credit shelter trust

by Adler Pollock & Sheehan P.C.

For years, the credit shelter trust has been a standard weapon in married couples’ estate planning arsenals. Today, however, a $5.34 million estate tax exemption amount combined with portability of exemptions between spouses means that traditional estate planning vehicles are less critical than they once were. Nevertheless, credit shelter trusts continue to offer significant benefits, particularly for high-net-worth taxpayers.

Affluent families looking for ways to reduce their gift and estate tax bills should consider a Supercharged Credit Shelter TrustSM (SCST)*. An SCST enhances the benefits of a conventional credit shelter trust.

Making the most of the exemption

To understand how an SCST works, some background on the credit shelter trust is necessary. A credit shelter trust is designed to take advantage of each spouse’s exemption and ensure that neither is wasted. Suppose, for example, that Jane’s estate is worth $15 million. If she leaves all of her wealth outright to her husband, Allan, the unlimited marital deduction will shield it from estate taxes. Before portability, if Allan were to die and leave $15 million to the couple’s children, his estate would owe $3,864,000 in estate taxes (assuming a $5.34 million exemption and a 40% tax rate).

Had Jane set up a testamentary credit shelter trust, the tax bill would have been substantially smaller. The trust, funded with an amount equal to Jane’s estate tax exemption ($5.34 million) would provide Allan with an income interest for life, after which the funds would then go to the couple’s children. The trust would take full advantage of Jane’s exemption and, by limiting Allan’s rights to the trust principal, the funds would bypass his estate. The remaining $9,660,000 in Jane’s estate would pass to Allan either outright or in a marital trust. When Allan dies, assuming his estate is worth $9,660,000 (and the exemption amounts and tax rates haven’t changed), the estate tax would be $1,728,000, for a $2,136,000 savings.

Portability allows a couple to take advantage of both spouses’ exemptions without the need for a credit shelter trust or other sophisticated estate planning tools. Provided certain requirements are met, portability allows a surviving spouse to add a deceased spouse’s unused exemption amount to his or her own. So, in the previous example, Jane could have left $15 million to Allan outright, and Allan could have added Jane’s exemption to his own, shielding $10.68 million from taxes in his estate. Assuming Allan’s estate is still worth $15 million when he dies, the estate tax liability would be $1,728,000 ($15 million – $10.68 million × 40%), the same tax outcome as a credit shelter trust.

There are several disadvantages to relying on portability, though. First, unlike a credit shelter trust, portability doesn’t shield future income and appreciation from estate taxes. Suppose, for example, that Jane’s estate plan establishes a credit shelter trust funded with $5.34 million in assets. If, when Allan dies, the trust’s value has grown to $8.34 million, the $3 million in appreciation will bypass Allan’s estate and escape estate taxes. Had Jane relied on portability, that $3 million in growth would end up in Allan’s estate, potentially triggering an additional $1.2 million in estate taxes.

Second, portability doesn’t apply to the generation-skipping transfer (GST) tax exemption. So, for couples who wish to preserve both spouses’ GST tax exemptions to reduce taxes on gifts to their grandchildren, a credit shelter trust is the best option.

Finally, credit shelter trusts offer some protection from creditors’ claims against the trust assets. Outright gifts offer no such protection.

Enhancing the benefits

One drawback of a conventional credit shelter trust is that taxes on the trust’s income hamper its ability to grow and compound for the benefit of the trust beneficiaries. Under the complex distributable net income rules, trust income is taxed to the trust or to the beneficiaries (or both), depending on the amount of distributions the trust makes each year. Either way, these taxes erode the trust assets, leaving less for the beneficiaries.

An SCST “supercharges” the credit shelter trust by ensuring that it’s treated as a grantor trust with respect to the surviving spouse. As grantor, the surviving spouse pays the taxes on the trust’s income, allowing the trust assets to grow tax-free for the beneficiaries.

Under the grantor trust rules, the grantor’s tax payments don’t constitute taxable gifts to the beneficiaries. Essentially, by paying taxes that would otherwise come out of the trust’s income, the grantor makes an additional, tax-free gift to the beneficiaries.

How do you ensure grantor trust treatment? After all, credit shelter trusts ordinarily are established by bequest according to the deceased spouse’s will or revocable trust, so the deceased spouse is the grantor.

One way is to give the surviving spouse the right to withdraw trust principal, but this would cause the trust assets to be included in his or her estate. The key to an SCST is for the spouse who ultimately will be the surviving spouse to set up a lifetime qualified terminable interest property (QTIP) trust to fund a credit shelter trust of the first spouse to die. The QTIP trust assets will be included in the deceased spouse’s estate, and the surviving spouse will be treated as the grantor (for income tax purposes) of the credit shelter trust created from the QTIP trust. (Be aware that, for this strategy to work, the beneficiary spouse must be a U.S. citizen. Otherwise, the QTIP trust won’t qualify for the marital deduction, exposing the trust to gift tax.)

Careful drafting required

To make an SCST work, you need to consider a number of complex gift and estate tax rules, including the reciprocal trust doctrine. (See the sidebar “Watch out for reciprocal trusts.”) Careful drafting is required to avoid triggering unnecessary gift, estate or income taxes.

* “Supercharged Credit Shelter TrustSM” is a service mark of Mitchell M. Gans, Jonathan G. Blattmachr, and Diana S. C. Zeydel, whose article on this subject appears in the July/August 2007 issue of  Probate & Property magazine.

Sidebar: Watch out for reciprocal trusts

Typically, a couple who wish to take advantage of a Supercharged Credit Shelter TrustSM (SCST) each establishes a lifetime qualified terminable interest property (QTIP) trust for the benefit of the other, designed to fund a credit shelter trust for the benefit of the surviving spouse. A couple who create identical trusts at the same time risk running afoul of the reciprocal trust doctrine, which can unravel an SCST’s tax benefits. The doctrine prohibits a couple from avoiding taxes by using trusts that 1) are interrelated, and 2) place each grantor in the same economic position as if they’d each created trusts naming themselves as beneficiaries.

For SCSTs, the biggest risk is that the IRS will invalidate the QTIP trusts, causing the entire amount contributed to the trusts to be taxable gifts. There are several ways to avoid the reciprocal trust doctrine, including giving each QTIP trust beneficiary a special power of appointment, varying the terms of the trusts so they’re not identical or establishing the trusts at different times.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Adler Pollock & Sheehan P.C. | Attorney Advertising

Written by:

Adler Pollock & Sheehan P.C.

Adler Pollock & Sheehan P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.