A credit shelter trust is an estate-planning strategy for married couples. This type of trust may
provide control over the assets for the creator of the trust and tax efficiency for the surviving
spouse and beneficiaries. It is also sometimes known as a bypass trust or family trust.
A credit shelter trust allows you to set aside a
certain portion of your assets upon your death.
There are a variety of reasons to discuss a credit
shelter trust with your estate-planning attorney.
Control over assets
The spouse who sets up the trust can determine how
the assets will be distributed. The surviving spouse can
receive income and principal from the trust during his or
her lifetime. When he or she passes away, the remaining
amount in the trust goes to the beneficiaries designated
by the spouse who created the trust.
This type of trust can be helpful in cases where the
creator of the trust wants to control the distribution of
the assets after his or her death. This is common with
second or later marriages, where the creator of the trust
has his or her own children and would like for them to
inherit their separate assets.
Creditor claims protection
A credit shelter trust can help protect assets from
claims by divorcing spouses, spouses from subsequent
marriages and creditors. Generally, creditors cannot
access the principal in the trust to meet their claims
against the trust beneficiaries.
Federal estate tax exclusion
A credit shelter trust allows a married couple to benefit
from the federal estate tax exclusion of the first spouse
to die so trust assets are sheltered from future estate tax.
Any growth or appreciation of those assets while in the
trust is similarly protected from estate tax.
A portability provision gives married couples a chance
to save an unused exclusion amount without a credit
shelter trust (see Federal Estate Tax and Portability in
the blue section to the right). However, assets passed via
portability are not protected from generation-skipping
transfer (GST) taxes, nor do they have the control or
creditor protection advantages of a credit shelter trust.
State estate tax exclusion
Several states have their own state estate tax in addition
to the federal estate tax. A credit shelter trust may be the
only option to use the state estate tax exclusion of the
first spouse to die.
Federal estate tax and portability
The American Taxpayer Relief Act of 2012
updated the federal estate tax exclusion amount
and provided for occasional increases to offset
inflation. The Tax Cuts and Jobs Act enacted in
2017 made increases to the exclusion amount
through 2025. In 2024, you may be able to transfer
up to $13.61 million (up from $12.92 million in
2023) at your death free from federal estate tax.
Any amount exceeding the exclusion can be taxed
up to 40%.
The portability provision states that when a person
passes away, the surviving spouse may retain the
deceased spouses unused exclusion amount. For
instance, if a husband dies in 2024, his wife may
be able to use their full $27.22 million exclusion
(up from $25.84 million in 2023) without planning
for it. There are certain tax-filing requirements that
must be satisfied to take advantage of this option.
You should talk with your qualified tax advisor
about your situation.
Proactive planning can help ensure you have
control over your estate and benefit from tax-
saving strategies.
You may think the portability provision means you dont need to plan to protect your legacy and reduce estate tax;
however, that may not necessarily be the case. Although portability, in some situations, may provide advantages to
some married couples, considering a credit shelter trust could have benefits for you and your family. You should work
with your estate-planning attorney and tax advisor to determine the appropriate plan for you.
Portability (transfer to spouse)
Credit shelter trust
The surviving spouse has full
access and control over all the
assets.
The spouse who sets up the trust
designates the beneficiaries. The
surviving spouse and/or other
beneficiaries may receive benefits
from the assets in the trust during
their lifetimes.
Growth of the assets may be
subject to estate taxes when
the surviving spouse dies.
Growth of the assets in the trust
generally is not taxed for estate
tax purposes upon the death of
the surviving spouse.
Assets can be subject to
creditor claims.
Assets are typically protected
from creditor claims.
Assets may be subject to state
estate taxes.
Assets may not be subject
to state estate taxes.
All assets, including those from
the first spouse to die, generally
get a full step-up in cost basis at
the surviving spouses death.
Assets do not get a step-up in
cost basis at the surviving
spouse's death.
Portability exclusion does not
apply to federal GST taxes.
With proper planning, assets may
not be subject to GST taxes.
What is a step-up
in cost basis?
Cost basis generally is the price
you paid for an asset. If you buy a
stock for $5 per share, your basis
is $5. If you still own that stock at
death and the fair market value is
$10, your estate may get a
step-up in basis to the fair market
value at your death. So, your
estate holds the stock with a $10
basis, allowing your estate to pass
assets to your beneficiaries at the
new basis or to sell the asset,
potentially without capital gain.
This typically means less income
tax burden for your beneficiaries
as they inherit your assets.
Review your plan regularly
During the past 10 years, estate tax laws have constantly
changed. Thats why its important to remain diligent
when working toward your long-term investing and
estate goals.
Its important to review your estate plan every three to five
years. You should also review it when changes in estate tax
law occur or when your life circumstances change, such as
a birth, marriage, divorce or death in the family.
Chad Choate III, AAMSTM
Financial Advisor
828 3rd Ave W
Bradenton, FL 34205-8665
941-462-2445
Your estate-planning attorney, tax advisor and financial
advisor can work with you to determine whats best for
your situation.