With new tax laws, do Californians need credit shelter trusts?


By this time of the year, most Sacramento residents will have received all the forms and paperwork necessary to file their income taxes for 2013. Some may find windfall refunds awaiting them; others will be less lucky and end up owing money to the state of California and to Uncle Sam. But while the subject of taxes is fresh in the minds of local residents, it is worth noting that there are options available for those wondering how to reduce federal taxes on their estates.

For married couples with children, a common strategy has been the use of A-B trusts, or credit shelter trusts. Credit shelter trusts can reduce couples' estate tax liability by hundreds of thousands. The way they work is that the spouses leave property to each other in trust; when one dies, the other receives the property. Then when the second spouse dies, the children in turn get the property.

It is worth noting, however, that tax changes in recent years may offer some alternatives to the credit shelter trust. "Portability" allows surviving spouses to combine any unused amount of a deceased partner's applicable exclusion (i.e., the $5.34 million any person can transfer to his or her heirs without incurring tax liability) with their own. So if a couple's total financial assets are going to be below $10 million or so, a credit shelter trust might be unnecessary -- particularly here in California, where there is no state estate tax in addition to the federal estate tax.

Trusts can be efficient tools for reducing taxation on an individual or a married couple's estate, and they can also allow parents with children from different marriages to direct where property will go, but they may not always be the best option for every situation. An estate planning attorney will be well-versed in the current laws and can help answer questions Sacramento residents may have as to whether they should consider establishing a living trust.

Source: Forbes, "Freebasing Your Estate," Deborah L. Jacobs, Feb. 12, 2014

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