Which of the following is NOT an advantage of the credit shelter portion of the A-B trust in the era of portability?

• A. Appreciation after the death of the first spouse is not included in the surviving spouse's estate.
• B. Preservation of the full GST exemption for each spouse.
• C. Asset protection for the surviving spouse.
• D. Lower income tax for trust income retained in the trust.

Answer: (D)

The key idea is that the credit shelter portion of an AB trust is built to minimize estate taxes and protect assets for future generations, not to reduce income taxes on retained trust income. By funding the credit shelter trust with the deceased spouse’s unused exemption, appreciation inside that trust does not flow into the surviving spouse’s estate, preserving more of the family’s wealth for later heirs. It also preserves the GST exemption so generations can be protected from skip-tax implications, and the trust structure offers asset protection for the surviving spouse.

Retaining income inside the trust, however, is typically less favorable for income tax purposes because trust income is taxed at trust rates, which are generally higher and reach the top bracket sooner than individual rates. Distributing income to the surviving spouse can, in many situations, result in more favorable personal tax treatment. So, the notion of achieving lower income tax by keeping income in the trust is not an advantage of the credit shelter portion.