Streamlining Your Trust: One Simple Step

Over a decade ago, we wrote a practical article (“Is It Time for an Estate Plan Review? You Be the Judge“) that lists several triggering events that might warrant updating your will or trust. The following article addresses an issue that was not included in that list and frequently applies to older trusts.

If (a) you are married, (b) the value of your estate is below the estate tax threshold, and (c) your estate plan hasn’t been reviewed recently, your trust might include a provision that unnecessarily complicates things and should probably be removed.

To address potential estate tax liability that, for most couples, no longer exists, many older trusts require, on the death of the first spouse, that the surviving spouse allocate the couple’s assets between two trusts: the survivor’s trust and a credit shelter trust.

If the value of your estate is below the taxable threshold (for 2024, a combined $27.2 million for a married couple), there is no reason for that provision; it needlessly causes the surviving spouse to deal with an irrevocable credit shelter trust along with their own revocable survivor’s trust.

Thanks to estate and gift tax “portability,” which went into effect more than a decade ago, a surviving spouse inherits any unused portion of their deceased spouse’s estate and gift tax exemption. If the first spouse to die did not use up their full exemption, the surviving spouse can effectively double their exemption amount when it comes to their estate tax liability. While a federal estate tax return, IRS Form 706, would need to be filed to take advantage of this portability, it would be needed only if the couple’s combined estate value exceeded an individual’s estate tax exemption amount, roughly $14 million, at least in 2024 and 2025.¹  

As a result, unless you and your spouse have an estate worth more than roughly $27 million², and the current law is extended to 2026 and beyond, there is no estate tax reason to bifurcate your assets between the survivor’s trust and the credit shelter trust.

The simple solution: Amend or restate your trust to remove the separation-of-assets requirement and make it entirely a survivor’s trust.

If we’re performing the review, we will first look for good reasons (tax or otherwise) to continue to divide assets on the death of the first spouse. Examples might include a blended family situation, where one or both spouses might wish to protect their share for children from a prior marriage.

If we do not identify a reason to maintain the status quo, we will recommend the necessary modifications to simplify your trust provisions.

To schedule a review of your trust, contact Ron Adams or Ryan Scharber at 480-345-8845.

Background. When splitting assets between a survivor’s trust and a credit shelter trust, the deceased spouse’s assets are divided into two trusts: one for the surviving spouse (the “survivor’s trust”) and one for other beneficiaries, which may also include the surviving spouse (the “credit shelter trust”).

In a credit shelter trust (also known as an “B” trust or “bypass” trust), assets are held for the surviving spouse’s benefit after the first spouse dies. The surviving spouse can receive mandatory or discretionary income and some access to the principal, and the assets are not included in the survivor’s taxable estate. When the surviving spouse dies, the remaining assets pass to the beneficiaries named in the trust without taxes due.

One of the disadvantages of a credit shelter trust is that it does not give the surviving spouse immediate access or full control over the principal of the trust’s assets. Instead, the spouse can generally receive income from the trust and may be allowed to use the trust principal to pay for health, education, and maintenance as needed.

A survivor’s trust (also known as an “A” trust) is a common estate planning tool for married couples. Its purpose is to ensure that the surviving spouse has access to a portion of the couple’s assets after the death of the first spouse. It includes the remaining assets of the deceased spouse after the credit shelter trust is funded, plus the surviving spouse’s assets. The surviving spouse has full control over the assets in this trust. 

While this strategy can help save on estate taxes, as we discussed above it may be beneficial only in limited circumstances.

 ¹ Under current law, an individual’s estate tax exemption amount is slated to drop to roughly $6.2 million on January 1, 2026.

 ² If you and your spouse have an estate worth roughly $14 million or less, you would not even need to file a federal estate tax return to take advantage of porting to the surviving spouse the first-to-die spouse’s unused estate tax exemption.