Tag Archives: estate tax

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.

What is an Estate Tax?

Estate taxes can be complex and difficult to understand, especially since the law is frequently changing in this area. If you have estate tax planning concerns, you should seek the advice and guidance of a knowledgeable estate planning attorney. Below are a few pointers for a general understanding of estate taxes.

The estate tax is a federal tax on transfers that is imposed on the estate of a deceased person. Nine months after an individual dies, the estate tax return and the payment of taxes, if any, is due.

The good news is that the majority of estates do not owe taxes because of the various exemptions that are available for each decedent. The amount of the applicable exemption changes fairly frequently, so it is important to be aware of the current amount allowed. In 2002 and 2003, the exemption amount was $1 million. It was increased to $1.5 million in 2004 and 2005, $2 million in 2006 through 2008, then up to $3.5 million in 2009. There was no estate tax at all for individuals who died in 2010. In 2011, the exemption was raised to $5 million per person in 2011, it was $5,120,000 per person in 2012, and in 2013 it was $5,250,000. In 2014, it was $5,340,000 and the 2015 estate-tax exemption is $5.43 million per individual. This means that if your estate does not exceed the exempt amount, now $5.43 Million, your estate will not pay an estate tax!

In order to get an estimate of how much estate tax will be due, you should add up all of the property in the estate that is subject to an estate tax. Essentially, this is everything you own or control, including pension plan assets, IRA’s, 401(k)’s, and life insurance you have control of. From this total, you subtract all of the applicable exemptions and deductions (this isn’t intuitive, so if your total assets add up to $5.43 Million or more, you need to see counsel to review this with you). If the end result is more than zero, there may be some estate tax due.

A qualified estate planning attorney should be able to advise you about this and help you understand whether you are subject to the estate tax or not. Surprisingly, there are attorneys that claim to be estate planners who do not understand the estate tax. Ask those specific questions to the attorney you are working with. If he or she is the least bit unclear about this area of law, they are not the estate planning attorney for you!

To learn more about what property is subject to estate taxes or what exemptions and deductions may apply, contact us to schedule an initial consultation.

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.