Sometimes referred to as an AB Trust, or Bypass Trust, a Credit Shelter Trust is used when a couple either has a taxable estate or is likely to have a taxable estate by the time they pass. Although the current federal estate exemptions are high ($24,120,000 in 2022), they will drop to an estimated $6,000,000 by 2025, and could be reduced further if the legislature passes a new law. You should create an estate plan for where you are, not for all the “what-ifs” of the world. However, if your assets are around or above $10,000,000 as a couple, a Credit Shelter Trust should at least be considered.
What Does A Credit Shelter Trust Do?
- Estate Tax Avoidance or Reduction
Let’s say a couple has an estate valued at $12,000,000 when the husband passes. Let us also assume the exemption amount is $5,000,000 per person. Upon the husband’s death, two trusts are created: The Credit Shelter Trust and the Marital Trust. The husband’s maximum exemption amount ($5,000,000) would be put into a Credit Shelter Trust. The remaining $7,000,000 of the husband’s assets would be placed into a Marital Trust. The Credit Shelter Trust could provide for wife for her lifetime, and the wife can even be the Trustee of the trust. The wife will use her own funds (assets outside of the trust) or the Marital Trust to pay for daily life, trips, or whatever else the wife wants to use the money on. The goal is to leave the Credit Shelter Trust assets mostly untouched and allow them to grow. When the wife dies, the value of the Credit Shelter Trust has increased from $5,000,000 to $7,000,000. This $7,000,000 would pass to the couple’s children (also in trust in the case) without being subject to estate tax. Meanwhile, because the wife used the Martial Trust assets, there was $4,000,000 in the Marital Trust at her death. The wife had not used any of her lifetime exemption and so that $4,000,000 also passes to the children free of tax.
- Asset Protection
A well drafted Credit Shelter Trust will protect the assets from creditors, re-marriage, new step-children, and possible even an abuse of the funds by the surviving spouse. The Credit Shelter Trust can also provide for asset management if the surviving spouse becomes incapacitated and cannot manage their financial affairs later in life.
- Control Over Inheritance
Trusts can allow you to set the terms for your beneficiaries’ inheritance. Lifetime trusts, making distributions as set ages, intervals, or upon achieving life goals can all be way to assure that a lifetime of hard work is used wisely and passed to children, grandchildren, and even greatgrandchildren. Trusts can also make provisions for the unexpected, like a special needs beneficiary.
Talk to an attorney at Grissom Law today to see if a Trust with a Credit Shelter Trust is right for you. Creating the best estate plan for your needs today and for your future requires looking at you needs holistically. Financial considerations, familial relations, and personal goals all need to be considered.
Disclaimer
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