Credit Shelter Trusts in Wisconsin

August 27, 2018

In years past, many Wisconsin couples set up credit shelter trusts as part of their estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity., to avoid or reduce Wisconsin and Federal estate taxes upon death. Due to changes in Wisconsin and Federal estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. laws, many credit shelter trusts are no longer necessary. They should be revised to save time and expense.

What is a Wisconsin Credit Shelter Trust?

Credit shelter trusts have many names in Wisconsin. Common names for a joint revocable trustA trust created during lifetime that can be terminated, amended, or modified by the person creating it. A Revocable Trust is often used in Wisconsin to avoid probate and provide for the orderly and proper distribution of assets upon death of its creator and to provide for management of assets and property if the creator of the trust becomes incapacitated. that splits into two trusts at the death of the first spouse are known as an A and B TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., Marital TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., Survivor’s TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., and Family TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. When the first spouse passes, the original trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. splits the assets into two separate trusts, to shelter a portion of the assets from future estate taxes.

Why Use Credit Shelter Trusts?

The primary reason for setting up credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. in Wisconsin was to avoid the Wisconsin estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. and to avoid or limit the federal estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax.. This was accomplished by allowing the original revocable trustA trust created during lifetime that can be terminated, amended, or modified by the person creating it. A Revocable Trust is often used in Wisconsin to avoid probate and provide for the orderly and proper distribution of assets upon death of its creator and to provide for management of assets and property if the creator of the trust becomes incapacitated. to split into two separate trusts upon the first spouse’s death. This split allowed the surviving spouse to double the amount that would escape Wisconsin and Federal estate taxes.

(For simplicity when we refer to “family trust”, we willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. refer to the irrevocable credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. created upon the death of the first spouse.)

When to Revise a Wisconsin Credit Shelter Trust?

Due to changes in the Federal Estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. laws and the elimination of the Wisconsin estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax., many couples with Wisconsin credit shelter trusts willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. no longer benefit from having a such a trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. In fact, many Wisconsin couples willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. be hurt by having a credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. due to increased trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. administrationA process during which the deceased persons assets pay debts, claims and funeral expenses and the remaining estate funds are then distributed according to the wishes of the deceased person set forth in the Will or Trust. The Administrator is in charge of the process and must follow what is set forth in the Will or Trust. If there is no Will or Trust, the distributions and payments are made according to the law of the applicable state and is called intestate succession. expenses and increased complexity upon the death of the first spouse.

Splitting the original revocable trustA trust created during lifetime that can be terminated, amended, or modified by the person creating it. A Revocable Trust is often used in Wisconsin to avoid probate and provide for the orderly and proper distribution of assets upon death of its creator and to provide for management of assets and property if the creator of the trust becomes incapacitated. into two separate trusts upon the death of the first spouse requires the filing of a complex 706 estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. return, obtaining an EIN for the family trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. and additional ongoing 1041 income tax returns and asset retitling. In short, there is significant cost and work to splitting a trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. into the required two trusts upon the death of the first spouse.

With today’s tax laws, this extra work and cost is only worth it when there willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. be significant estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. savings. While there are some other potential benefits to a credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. arrangement, the primary benefit was avoiding estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax..

No Estate Tax Issue: Is a Credit Shelter Trust Worth It?

If there are not estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. issues, the extra cost time, and hassle may not be worth the limited value of having the original trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. split into two separate trusts. Therefore, it may be best to amend the original revocable trustA trust created during lifetime that can be terminated, amended, or modified by the person creating it. A Revocable Trust is often used in Wisconsin to avoid probate and provide for the orderly and proper distribution of assets upon death of its creator and to provide for management of assets and property if the creator of the trust becomes incapacitated. to no longer provide for the division into two trusts upon the first spouse to pass. This amendment can be a relatively simple and inexpensive process if both spouses are still living and able to sign.

The Funded Credit Shelter Trust: Revising Credit Shelter Trusts If a Spouse Has Already Passed

With credit shelter trusts, once the first spouse passes, the family trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. is an irrevocable trustA trust that cannot be terminated, revoked or amended by the creating person. In Wisconsin and in estate planning an irrevocable trust can refer to a trust that is set up to protect assets from a nursing home and Medical Assistance if prepared and funded well in advance. See Using Trusts to Protect Assets from Nursing Homes in order to comply with IRS estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. regulations. So, the surviving spouse cannot simply amend the credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. to eliminate the division into two trusts. However, all is not lost.

Through a Non-Judicial Settlement Agreement, it is possible to revise an irrevocable trustA trust that cannot be terminated, revoked or amended by the creating person. In Wisconsin and in estate planning an irrevocable trust can refer to a trust that is set up to protect assets from a nursing home and Medical Assistance if prepared and funded well in advance. See Using Trusts to Protect Assets from Nursing Homes even after the first spouse has passed away. Doing so requires cooperation from the surviving spouse and all of the “qualified” beneficiaries of the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. along with the trusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity..

(Although beyond the scope of this article, we willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. discuss the use of Non-Judicial Settlement Agreements in Wisconsin in a future article. We willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. cover how these can be used to revise and amend irrevocable trusts.)

Estate Tax Changes – Focus on Eliminating Capital Gain Taxes

In the past, when estate taxes were higher than capital gains tax, it made sense to divide trusts to avoid paying estate taxes. However, the tradeoff was that the credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. assets would likely end up paying capital gains tax upon the death of the surviving spouse.

Now, when estate taxes are no longer an issueA person’s children and/or lineal descendants such a grandchildren and great-grandchildren. It refers to a direct blood line in Wisconsin along with legally adopted persons. In Wisconsin the term “issue by right of representation” is commonly used to indicate that a share of beneficiary, if predeceased, shall be distributed to his or her children or lineal descendants. Although slightly different this is often also referred to as Per Stirpes distribution., revising an existing funded credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. is still possible. Doing so may be the best course of action to eliminate or reduce capital gains taxes.

Simply put, certain tax provisions can be added to the irrevocable trustA trust that cannot be terminated, revoked or amended by the creating person. In Wisconsin and in estate planning an irrevocable trust can refer to a trust that is set up to protect assets from a nursing home and Medical Assistance if prepared and funded well in advance. See Using Trusts to Protect Assets from Nursing Homes to trigger estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. inclusion in the taxable estate of the surviving spouse upon the surviving spouse’s death.

(Although beyond this article’s scope, we may include a “power of appointment” in favor of the surviving spouse in the family trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. We might also include a right of the surviving spouse to amend, alter, revoke or terminate the beneficial enjoyment of said trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. As this is cutting edge estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity., many of these revisions have not fully made it through the court system.)

Revising Existing Funded Credit Shelter Trusts is Complicated

In an existing funded credit shelter trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., the best way to eliminate capital gains tax is very complicated. By including the family trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. assets in the estate of the surviving spouse (where this willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. not create an estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax.), we can obtain a step-up in basis upon the death of the surviving spouse thereby reducing or eliminating capital gains tax.

Do You Have a Wisconsin Credit Shelter Trust?

Our estate planning attorneys have created and reviewed thousands of joint revocable trusts and credit shelter trusts for our Wisconsin clients. We can review older Wisconsin trusts and determine, based upon the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., family situation, assets, and more, the best course of action to take with Wisconsin credit shelter trusts. We invite you to contact us today to discover how we can help you.