What is a Credit Shelter Trust?<\/span><\/h2>A credit shelter trust (CST) is a trust that is made after the demise of the first spouse of a married couple. <\/p>
Assets put in the trust are normally held differently from the estate of the surviving spouse, so that they may hand it over to the remaining beneficiaries at the death of the surviving spouse.<\/p>
The assets that are held in the CST can be of advantage to the surviving spouse only while they are alive.<\/p>
Furthermore, the credit shelter transfer not only saves the demised spouse\u2019s death tax credit but also shelters the assets from the surviving spouse\u2019s creditors and future spouses. <\/p>
The credit shelter trust can also be drawn up to make sure that the assets pass to the demised spouse\u2019s children or family at the surviving spouse\u2019s death. Keeping them out of the reach of the surviving spouse\u2019s next spouse.<\/p>
READ MORE: Trade Finance: Overview, Definition, Course, Examples<\/a><\/p>What Does The Credit Trust Shelter Involve?<\/h2>
Credit Shelter Trust is set up to let wealthy couples reduce or completely escape estate taxes when passing assets on to their heirs or beneficiaries, normally, their children. <\/p>
In addition, credit shelter trusts are made upon a married person\u2019s death and are financed with that person\u2019s whole estate or a part of it as written out in the trust agreement. These assets then move to the surviving spouse. <\/p>
The trust is managed by a selected trustee and for this reason, the surviving spouse never really takes total control of the trust\u2019s assets. Hence, the transfer does not make any addition to the taxable estate of the surviving spouse.<\/p>
Furthermore, a last will and testament can give directions that a credit shelter trust is created and financed at the death of the first spouse, with a part of or all of the demised spouse\u2019s available assets. <\/p>
The credit shelter trust will still be of advantage to the surviving spouse in such a way that it gives the surviving spouse the right to some of the trust\u2019s income. As well as the ability to withdraw trust principal for the spouse\u2019s education, health, maintenance or support. <\/p>
Furthermore, the assets of the trust are weighed outside the surviving spouse\u2019s estate and will be passed on to the remaining beneficiaries, tax-free, when the surviving spouse dies. <\/p>
For this to work optimally, each spouse is supposed to have enough assets in their own name. So that the value of each spouse\u2019s assets meets or exceeds the applicable exclusion amount.<\/p>
A credit shelter trust can be drafted in different ways to serve a purpose. Hence, it is important to meet with an estate planning attorney to draft it out in a way that accomplishes its purpose.<\/p>
READ MORE: Open Banking: Definition & How it Works<\/a><\/p>Credit Shelter Trust Diagram<\/h2>![\"credit-trust-network-diagram\"](\"https:\/\/businessyield.com\/wp-content\/uploads\/2021\/08\/creit-trust-network-diagram.png\")
<\/a>Image source: Buell & Ezell, LLP Attorneys at Law<\/em><\/figcaption><\/figure><\/div>Credit Shelter Transfer Example<\/h2>
Here is an example of Credit Shelter Trust from Bankrate<\/a><\/p>Daphne and Niles have two sons, Peter and Paul. Thanks to their successful careers, the couple\u2019s joint estate is estimated to be worth $12.5 million and is still growing. <\/p>
Although Daphne will not have to pay estate taxes when Niles dies, their children will likely face a big tax bill when Daphne dies. This is because the joint estate will be greater than the $10.98 million exclusion allowed for a married couple. <\/p>
To minimize future tax obligations for their descendants, they speak to their attorney, who draws up a credit shelter trust.<\/p>
READ MORE: Average Collection Period (ACP): Formula, Calculations & Importance<\/a><\/p>Pros and Cons of Credit Shelter Trust<\/h2>
As much as credit shelter trust has lots of advantages, it also has a downside. Below are the pros and cons of the credit shelter trust tool.<\/p>
Pros of Credit Shelter Transfer<\/h3>
Below are the advantages of credit shelter transfer. <\/p>
#<\/strong>1. It offers protection of assets<\/h4>Assets are protected when they are being held in trust by the surviving spouse. There are a lot of facts that determine the provision of distribution of the trust. These factors include; <\/p>
- Provisions of distribution of the trust<\/li>\n\n
- Who is named as the trustee of the trust, <\/li>\n\n
- Protection from creditors or from a future divorce \u2013 if the surviving spouse were to remarry \u2013 can be a benefit.<\/li><\/ul>
#2. It helps ensure the use of immunity<\/strong> <\/h4>If the appropriate paperwork is not filed when the first spouse dies, the second spouse may lose immunity. <\/p>
By forcing the financing of the credit shelter trust, the first spouse to pass on can help make sure that his or her immunity is used.<\/p>
READ MORE: Lean Production: Definition, Methods, Advantage & Disadvantage<\/a><\/p>#3. It offers control <\/h3>
By making use of this trust, the first to demise can influence the way the assets are eventually distributed when the surviving spouse passes away. <\/p>
This can be important especially in situations where there has been a previous marriage that produced children or if the surviving spouse remarries. <\/p>
For instance, the first spouse to demise can ensure that the children from a first marriage receive the assets when the surviving spouse demises. Additionally, he\/she can monitor, the surviving spouse\u2019s capacity to spend the funds if the trust is set up correctly.<\/p>
This trust also gives people the capacity to control the manner in which the funds are shared with the younger family members. <\/p>
Many families are concerned about handing a lot of money to young adults. With a well set up trust, the amounts and timing of the distribution to the children when the surviving spouse demises can be controlled.<\/p>
#4. Protecting the initial intention of the trust\u2019s creator<\/h4>
In an integrated family, each spouse may intend to make sure that their share of the estate is passed to their chosen beneficiaries or children from a prior marriage. Credit shelter trust when set up well can carry out this intent properly.<\/p>
#5. Flexibility in the trust\u2019s sharing provisions<\/h4>
The trust can include a limited power of appointment for the surviving spouse. Hence, the surviving spouse may share the assets among a class of beneficiaries (e.g. \u201cthe issue of the demised spouse). <\/p>
For instance, a child who did not need a special needs trust at the time the trust was drafted, but after the decedent spouse\u2019s demise, a special needs trust was preferred. <\/p>
In this case, the surviving spouse would be able to appoint the assets to a new special needs trust to provide for that child.<\/p>
#6. Property tax benefits<\/h4>
A distribution to a child from the credit shelter trust is considered a transfer from the demised spouse and not the surviving spouse. <\/p>
The distribution can take advantage of the demised spouse\u2019s $1 million non-residence parent-child property tax reassessment exclusion. <\/p>
An additional $1 million in reassessment exclusion can benefit spouses who own valuable rental or vacation properties.<\/p>
READ MORE: Growth Investing Strategy: Step by Step Guide For Beginners (+Free Tips)<\/a><\/p>Cons of Credit Shelter Transfer<\/h3>
Below are the disadvantages of credit shelter transfer. <\/p>
- The trust possesses a separate tax ID number, so must file a separate tax return.<\/li>\n\n
- The surviving spouse must be willing to accept some rights and restricted control over the assets in the trust. If the trustee is someone other than the surviving spouse, then he\/she may receive trust assets for other reasons at the trustee\u2019s discretion.<\/li>\n\n
- Income tax returns must be filed in order for the trust to get the benefits of a credit shelter trust. If the assets used to finance the trust are complicated, this filing can be cumbersome and expensive.<\/li><\/ol>
Credit Shelter Trust New York<\/h2>
In New York, the estate tax exemption is presently $5.93 million but there is no \u201cgift\u201d tax. New York residents can gift up to the federal exemption amount ($11.7 in 2023) during their lifetime, even if said gifts exceed $5.93 million. <\/p>
However, any assets gifted within three years of a New York resident\u2019s date of death will be clawed back and includable in their estate. <\/p>
If a New Yorker dies with more than $5.93 million in their sole name, the estate will incur an estate tax rate between 5% and 16%. <\/p>
Additionally, the entire estate will pay tax, not just the amount over the limit referred to as estate tax cliff.<\/p>
New York does not offer portability rights. As such, a surviving spouse cannot use their demised spouse\u2019s unused immunity towards their own immunity. Unless it involves certain estate planning techniques, and the credit shelter trust is one of them.<\/p>
READ MORE: Value Investing: Detailed Guide To Value Investing Strategy<\/a><\/p>Credit Shelter Trust Vs. Marital Trust<\/h2>
A marital trust is a trust relationship between the trustor and the trustee for the benefit of a surviving spouse and the married couple\u2019s heirs. Also called an \u201cA\u201d trust, a marital trust goes into effect when the first spouse dies.<\/p>
A marital trust allows the couple\u2019s beneficiaries to avoid probate and take less of a hit from estate taxes by taking full advantage of the unlimited marital deduction. A provision that enables spouses to pass assets to each other without tax consequences.<\/p>
Although, when the surviving spouse dies, the remaining trust assets will be subject to estate taxes. To avoid this situation, a marital trust is sometimes used in conjunction with a credit shelter trust known as a \u201cB\u201d trust.<\/p>
Credit Shelter Trust Washington State<\/h2>
If you are married, a Washington Credit Shelter Trust effectively creates \u201cportability\u201d of your exemptions. <\/p>
Most wills in Washington State have this provision included in it. You create this trust alongside your will to receive assets when the first spouse dies. This is typically to preserve the $2.193 million exemption that would be lost by passing everything directly to the surviving spouse. <\/p>
The spouse is usually the trustee of this trust and may receive income from for life. Then upon passing, the proceeds go their beneficiaries free of Washington estate taxes.<\/p>
What Does The Credit Trust Shelter Involve?<\/h2>
Credit Shelter Trust is set up to let wealthy couples reduce or completely escape estate taxes when passing assets on to their heirs or beneficiaries, normally, their children. <\/p>
In addition, credit shelter trusts are made upon a married person\u2019s death and are financed with that person\u2019s whole estate or a part of it as written out in the trust agreement. These assets then move to the surviving spouse. <\/p>
The trust is managed by a selected trustee and for this reason, the surviving spouse never really takes total control of the trust\u2019s assets. Hence, the transfer does not make any addition to the taxable estate of the surviving spouse.<\/p>
Furthermore, a last will and testament can give directions that a credit shelter trust is created and financed at the death of the first spouse, with a part of or all of the demised spouse\u2019s available assets. <\/p>
The credit shelter trust will still be of advantage to the surviving spouse in such a way that it gives the surviving spouse the right to some of the trust\u2019s income. As well as the ability to withdraw trust principal for the spouse\u2019s education, health, maintenance or support. <\/p>
Furthermore, the assets of the trust are weighed outside the surviving spouse\u2019s estate and will be passed on to the remaining beneficiaries, tax-free, when the surviving spouse dies. <\/p>
For this to work optimally, each spouse is supposed to have enough assets in their own name. So that the value of each spouse\u2019s assets meets or exceeds the applicable exclusion amount.<\/p>
A credit shelter trust can be drafted in different ways to serve a purpose. Hence, it is important to meet with an estate planning attorney to draft it out in a way that accomplishes its purpose.<\/p>
READ MORE: Open Banking: Definition & How it Works<\/a><\/p> Here is an example of Credit Shelter Trust from Bankrate<\/a><\/p> Daphne and Niles have two sons, Peter and Paul. Thanks to their successful careers, the couple\u2019s joint estate is estimated to be worth $12.5 million and is still growing. <\/p> Although Daphne will not have to pay estate taxes when Niles dies, their children will likely face a big tax bill when Daphne dies. This is because the joint estate will be greater than the $10.98 million exclusion allowed for a married couple. <\/p> To minimize future tax obligations for their descendants, they speak to their attorney, who draws up a credit shelter trust.<\/p> READ MORE: Average Collection Period (ACP): Formula, Calculations & Importance<\/a><\/p> As much as credit shelter trust has lots of advantages, it also has a downside. Below are the pros and cons of the credit shelter trust tool.<\/p> Below are the advantages of credit shelter transfer. <\/p> Assets are protected when they are being held in trust by the surviving spouse. There are a lot of facts that determine the provision of distribution of the trust. These factors include; <\/p> If the appropriate paperwork is not filed when the first spouse dies, the second spouse may lose immunity. <\/p> By forcing the financing of the credit shelter trust, the first spouse to pass on can help make sure that his or her immunity is used.<\/p> READ MORE: Lean Production: Definition, Methods, Advantage & Disadvantage<\/a><\/p> By making use of this trust, the first to demise can influence the way the assets are eventually distributed when the surviving spouse passes away. <\/p> This can be important especially in situations where there has been a previous marriage that produced children or if the surviving spouse remarries. <\/p> For instance, the first spouse to demise can ensure that the children from a first marriage receive the assets when the surviving spouse demises. Additionally, he\/she can monitor, the surviving spouse\u2019s capacity to spend the funds if the trust is set up correctly.<\/p> This trust also gives people the capacity to control the manner in which the funds are shared with the younger family members. <\/p> Many families are concerned about handing a lot of money to young adults. With a well set up trust, the amounts and timing of the distribution to the children when the surviving spouse demises can be controlled.<\/p> In an integrated family, each spouse may intend to make sure that their share of the estate is passed to their chosen beneficiaries or children from a prior marriage. Credit shelter trust when set up well can carry out this intent properly.<\/p> The trust can include a limited power of appointment for the surviving spouse. Hence, the surviving spouse may share the assets among a class of beneficiaries (e.g. \u201cthe issue of the demised spouse). <\/p> For instance, a child who did not need a special needs trust at the time the trust was drafted, but after the decedent spouse\u2019s demise, a special needs trust was preferred. <\/p> In this case, the surviving spouse would be able to appoint the assets to a new special needs trust to provide for that child.<\/p> A distribution to a child from the credit shelter trust is considered a transfer from the demised spouse and not the surviving spouse. <\/p> The distribution can take advantage of the demised spouse\u2019s $1 million non-residence parent-child property tax reassessment exclusion. <\/p> An additional $1 million in reassessment exclusion can benefit spouses who own valuable rental or vacation properties.<\/p> READ MORE: Growth Investing Strategy: Step by Step Guide For Beginners (+Free Tips)<\/a><\/p> Below are the disadvantages of credit shelter transfer. <\/p> In New York, the estate tax exemption is presently $5.93 million but there is no \u201cgift\u201d tax. New York residents can gift up to the federal exemption amount ($11.7 in 2023) during their lifetime, even if said gifts exceed $5.93 million. <\/p> However, any assets gifted within three years of a New York resident\u2019s date of death will be clawed back and includable in their estate. <\/p> If a New Yorker dies with more than $5.93 million in their sole name, the estate will incur an estate tax rate between 5% and 16%. <\/p> Additionally, the entire estate will pay tax, not just the amount over the limit referred to as estate tax cliff.<\/p> New York does not offer portability rights. As such, a surviving spouse cannot use their demised spouse\u2019s unused immunity towards their own immunity. Unless it involves certain estate planning techniques, and the credit shelter trust is one of them.<\/p> READ MORE: Value Investing: Detailed Guide To Value Investing Strategy<\/a><\/p> A marital trust is a trust relationship between the trustor and the trustee for the benefit of a surviving spouse and the married couple\u2019s heirs. Also called an \u201cA\u201d trust, a marital trust goes into effect when the first spouse dies.<\/p> A marital trust allows the couple\u2019s beneficiaries to avoid probate and take less of a hit from estate taxes by taking full advantage of the unlimited marital deduction. A provision that enables spouses to pass assets to each other without tax consequences.<\/p> Although, when the surviving spouse dies, the remaining trust assets will be subject to estate taxes. To avoid this situation, a marital trust is sometimes used in conjunction with a credit shelter trust known as a \u201cB\u201d trust.<\/p> If you are married, a Washington Credit Shelter Trust effectively creates \u201cportability\u201d of your exemptions. <\/p> Most wills in Washington State have this provision included in it. You create this trust alongside your will to receive assets when the first spouse dies. This is typically to preserve the $2.193 million exemption that would be lost by passing everything directly to the surviving spouse. <\/p> The spouse is usually the trustee of this trust and may receive income from for life. Then upon passing, the proceeds go their beneficiaries free of Washington estate taxes.<\/p>Credit Shelter Trust Diagram<\/h2>
<\/a>Credit Shelter Transfer Example<\/h2>
Pros and Cons of Credit Shelter Trust<\/h2>
Pros of Credit Shelter Transfer<\/h3>
#<\/strong>1. It offers protection of assets<\/h4>
#2. It helps ensure the use of immunity<\/strong> <\/h4>
#3. It offers control <\/h3>
#4. Protecting the initial intention of the trust\u2019s creator<\/h4>
#5. Flexibility in the trust\u2019s sharing provisions<\/h4>
#6. Property tax benefits<\/h4>
Cons of Credit Shelter Transfer<\/h3>
Credit Shelter Trust New York<\/h2>
Credit Shelter Trust Vs. Marital Trust<\/h2>
Credit Shelter Trust Washington State<\/h2>