Tag Archives: estate taxes

Asset Protection, Estate Planning

Credit Shelter Trusts

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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.

Estate Planning

Why Does an Estate Need to File an Income Tax Return?

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We have many clients ask us why an estate must file an income tax return. The quick answer requires you to understand a simple concept that may come as a surprise. When someone dies, the assets they own create an “estate” which may be made up of income producing property and non-income producing property. The IRS has created rules which state that the estate is now a new, separate taxable entity. It is possible for an estate to receive income following an individual’s death. Someone has to pay taxes on that income so the estate has to file an income tax return.

Common examples include income from a business, rental property, dividends, or even the interest that accrues on the deceased’s checking or bank accounts. All of these are considered to be income from the Internal Revenue Service (IRS). You should also understand that an estate’s income taxes are different from estate taxes, which are based upon the value of the estate.

If an estate receives income after the individual dies and before the estate property has been distributed, it must be reported to the IRS. The appropriate form for reporting an estate’s income is Fiduciary Income Tax Return or Form 1041. If a beneficiary inherits an asset directly from the deceased, the estate does not have to report income on that asset. The beneficiary reports income from the date of death. For example if you inherited General Motors stock because of joint ownership, any dividends paid from the date of death must be reported by you.

In addition, if the estate earns income on certain assets, but then makes distributions to beneficiaries, the estate reports the income, but the beneficiaries may have to report it on their individual income tax returns and pay tax on the income.

Is it possible to avoid the fiduciary income tax? With our help and careful planning, it may not be necessary for a fiduciary income tax return to be filed. If all of the estate assets are quickly transferred to your beneficiaries, the estate will likely not hold the property long enough to earn enough income to require filing of a return. For example, assets that are held in a trust are generally distributed quickly, which can help minimize tax consequences. In contrast, if the probate process is delayed by family disputes or legal issues, the distribution of the estate assets can be delayed for months, even longer! As a result, the estate ends up holding the assets for a period of time, the estate receives income, and that results in the need for the estate to file an income tax return.

We can help trustees or executors understand the tax reporting rules and avoid tax reporting under the right circumstances.

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.