Tax Saving Wills & Revocable (Living) Trusts

In 1982 the marital deduction became unlimited, meaning one spouse may transfer all he or she owns to the other spouse during lifetime and at death, free from gift and estate tax. However, in many situations, leaving one’s entire estate outright to a surviving spouse does not minimize Tennessee inheritance tax and federal estate taxes due at the death of the surviving spouse.

Tax-savings trusts – also commonly referred to as credit-shelter trusts, bypass trusts or AB trusts – seek to fully exploit a spouse’s unified exemption amount by setting aside assets in trust for the benefit of the surviving spouse or other beneficiaries. If done so properly, the assets used to fund the credit shelter are set aside from inclusion in the surviving spouse’s estate at their death.

In 2010 Congress provided for “portability” between spouses, meaning any exemption amount not used by a predeceased spouse may be added to the exemption amount for the surviving spouse. In 2013 President Obama signed into law the American Taxpayer Relief Act of 2012 (the “Act”) which extends and makes permanent the estate and gift tax provisions enacted in 2010, including “portability”. However, if a surviving spouse remarries, portability of the predeceased spouse’s unused exemption may be lost. Given these limitations and the fact that Tennessee does not recognize portability for Tennessee inheritance tax purposes, credit-shelter trusts remain an important estate-planning tool for Tennessee residents.