Oct 1, 2009 12:00 PM

, By David L. Weinreb & Gregory D. Singer

It's a big mistake to forgo the estate tax savings of a CST — even if the trust is funded with an IRA

By David L. Weinreb & Gregory D. Singer

It's well known that a traditional IRA is a great way to save. Assets in an IRA can grow tax-deferred for decades. But tricky planning issues arise when a married couple has combined assets in excess of the estate tax exemption (currently, $3.5 million)1, but one or both of the spouses have insufficient assets outside of an IRA to fund a credit shelter trust (CST) fully. When that's the case, many estate planners question whether clients should use their IRAs to fund a CST at death, because doing so generally means giving up a lot of potential income tax deferral, and often taxing the IRA distributions at higher rates.

Our research shows that wasting the estate tax exemption of the first spouse to die by eschewing the CST creates an even greater tax burden — and is likely to be a mistake.

IRA in a CST