Credit Shelter Trusts

Many people are surprised to learn that there are a variety of different types of trusts that can be used in estate planning. One type of trust is called the “Credit Shelter Trust,” which is also sometimes referred to as a bypass or family trust. This type of trust permits two parties (typically spouses) to divide their assets between two trusts.

For 2015, the first $5.43 million of an estate is exempt from federal estate taxes. With a Credit Shelter Trust, a married couple could potentially have no estate tax with an estate that is less than $10.86 million. This could potentially double that portion of your children’s inheritance by avoiding estate taxes. Additionally, once assets are put into a Credit Shelter Trust, they are free from estate tax. This is true even if the value of the assets increase. Therefore, if the surviving spouse invests the trust assets wisely and doesn’t need the assets for support, your children’s inheritance can continue to grow, free of any estate tax. As we often tell clients (just to make a point), the Credit Shelter Trust could grow to a BILLION DOLLARS and no estate tax will be paid when they receive their inheritance.

The Credit Shelter Trust also protects your children in the event the surviving spouse remarries. Typically the trust will contain provisions that prohibit its use for anyone except your spouse and your children or grandchildren.

There is another advantage that most people fail to consider. When a Credit Shelter Trust is created, it protects the assets of the trust from the creditors of a surviving spouse. In other words, no matter what happens to the surviving spouse, the nest egg represented by the amount set aside in the Credit Shelter Trust is protected from claims for the life of the surviving spouse.

Typically, when the first spouse dies, the surviving spouse is left a certain amount in trust for their benefit (not to exceed the current federal estate-tax exemption). The remainder of the estate passes to the surviving spouse tax-free through a marital trust or outright bequest (with any remainder to pass to your children upon the death of the surviving spouse). The Internal Revenue Code does not consider the assets in the Credit Shelter Trust as included in the surviving spouse’s estate for the purpose of calculating estate taxes. The theory is that the surviving spouse did not have full ownership of the assets held by the Credit Shelter Trust. The beauty is that they have the benefits and use of the Credit Shelter Trust, but it is asset protected and protected from the estate tax.

It should also be mentioned that the estate tax is portable between the spouses. In other words, if the first spouse to die does not use all of his or her $5.43 million exemption, the surviving spouse’s estate can take advantage of it. The surviving spouse must make this election on the first spouse’s estate tax return.

In short, the Credit Shelter Trust is beneficial if you want to protect your surviving spouse financially. This type of trust provides your spouse with a source of income if needed, while also protecting him or her from creditors, and protecting your children from loss of inheritance. It’s an excellent planning tool.

To learn more about how a trust can benefit your family, call us today. 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.