Credit Shelter Trusts – Not Only for the Wealthy!

If you are interested in taking advantage of state and federal estate tax exemptions, a credit shelter trust may be a good option to consider. Most people associate this type of trust with millionaires, but there are several reasons to use this type of estate planning even if you have more modest means.

In 2015, the initial $5.43 million in an estate is exempt from federal taxes. This amount increases to $10.86 million for a husband and wife’s joint estate. Additionally, the estate tax is “portable” between spouses, so if the first spouse to die does not use all of his or her $5.43 million exemption, the estate of the survivor spouse can use it. However, it requires a significant amount of proper planning in order for the exemption of the first spouse to die to be effectively used. A credit shelter trust (also referred to as an A/B or bypass trust) is a tool for preserving both spouses’ exemptions. This is especially important in case the surviving spouse remarries. This could cause the loss of the previous’ spouse unused credit.

Many states have an estate or inheritance tax with thresholds that are often much lower than the current federal one. As a result, while it may not make sense to establish a credit shelter trust for federal tax purposes, it may be wise to do so for state tax purposes. For example, if a state inheritance tax applies to estates in excess of $1 million, when the first spouse dies and passes everything to the surviving spouse, the remaining estate could easily exceed the state’s $1 million threshold, leaving it subject to a substantial state inheritance tax. Gratefully, Utah does not have such a tax; but can you guarantee that you will live in Utah at your death? That presents a dilemma that we all face. Life changes and we can’t always predict what those changes will be.

By creating a credit shelter trust, the estate that exceeds the applicable state or federal exemption amount is split between the spouses for each to create a trust to “shelter” the first exemption amount in the estate of the first spouse to die. The terms of the trust typically provide for the trust income to be paid to the surviving spouse and the trust principal to be available to the surviving spouse as determined by the trustee’s discretion. If properly drafted, the credit shelter trust assets will not be considered part of the surviving spouse’ estate at their subsequent death and therefore not subject to estate or inheritance taxation. In short, the couple in our example can safeguard up to $2 million from estate tax while also making the entire estate accessible to the surviving spouse if necessary.

Even better, a credit shelter trust is also protected from creditors of the surviving spouse. Thus, if the surviving spouse becomes liable to creditors for any reason, i.e., medical expenses, personal injury, bankruptcy, divorce after remarriage, or otherwise, those assets in the credit shelter trust are protected from creditors. Sometimes that reason alone is enough to encourage clients to use credit shelter trusts.

If you are considering creating a credit shelter trust, it is important to seek the help of a qualified attorney. The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.