A credit shelter trust, also known as a bypass trust or a family trust, allows an estate owner to reduce or eliminate estate taxes on assets inherited by heirs without reducing the total financial value of the estate. A trust is a legal arrangement in which one person or entity (the grantor) transfers ownership of assets to another person or entity (the trustee) for the benefit of a third person or entity (the beneficiary). With a credit shelter trust, the grantor names a trustee to manage the trust property and benefit designated beneficiaries.
By creating a credit shelter trust, the grantor can minimize the impact of federal and some state estate taxes when those taxes are due, which helps preserve more of the inherited assets for the beneficiaries. Here’s how it works. When the grantor passes away, any assets that the trust holds are removed from the grantor’s estate. That way, the value of the estate is reduced, so the survivor will owe less tax upon death. Additionally, any gifts the trust makes to a beneficiary are exempt from gift taxes, while assets left in the trust are not subject to estate taxes.
The Benefits of a Credit Shelter Trust
The primary advantage of a credit shelter trust is the ability to pass assets on to heirs with minimal taxes. For example, a married couple can each allocate up to $5.45 million in assets into individual trusts. Upon the death of the first spouse, the assets within that trust are excluded from the estate tax calculation and can then pass on tax-free to the beneficiaries. Alternatively, the surviving spouse may choose to access the trust as trustee.
Another advantage of a credit shelter trust is its flexibility. The grantor can decide who the beneficiaries are and how assets are distributed. Furthermore, unlike other trusts, it can be revoked at any time when the grantor is alive, so long as the grantor is still legally competent. On the other hand, at the grantor’s death the trust becomes irrevocable.
Using Credit Shelter Trusts Wisely
Creating a trust is a complex process. It’s important to consult with an attorney to ensure that your trust is properly established and maintained. It’s also important to make sure that the trust document specifically reflects your wishes and that the trustee is someone you can trust to manage the trust in accordance with your wishes.
Credit shelter trusts are a powerful estate planning tool, but they should only be used after careful planning. Working with an experienced attorney will help ensure that the trust is set up correctly and that it meets your objectives.