Credit shelter trusts are often used by married couples to maximize estate tax savings. By combining the unlimited marital deduction, in which a spouse can leave an unlimited amount of property tax free to the surviving spouse, with a trust containing the amount of property that can pass free of Federal estate taxes, a family can lighten the load of estate taxes.
How does it work? A “credit shelter trust” of the amount of the Federal tax exemption, which is currently in a state of flux, in the first estate will be sheltered from estate taxes in the estate of the surviving spouse. This trust is most often a family trust, one that benefits all family members, or a marital trust, which benefits the surviving spouse. The balance of the first estate over the amount of the credit shelter trust can then pass tax free to the spouse under the unlimited marital deduction, either outright or by a trust.
Estate taxes are avoided in the first estate, and the property in the credit shelter trust escapes taxation in the survivor’s estate. The credit shelter amount can also be passed outside a trust by direct transfer to another family member if that is part of the overall estate plan. When the credit shelter trust and the surviving spouse’s exemption are combined, twice the amount of the Federal exemption threshold can pass through both estates free of Federal estate taxes, but there are specific laws, rules, and regulations that must be followed. In other words, don’t try this at home, or on your own!
Credit shelter trusts can be a valuable estate planning tool by maximizing Federal estate tax exemptions. A trust attorney can work with you to determine the best trust or estate planning tools to meet your family’s needs and goals.
Michael Robinson, Estate Planning Attorney
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