High-income couples face the potential of paying federal and, in New York, state estate taxes upon the death of one spouse. Each spouse may have an estate that is below the federal exemption, currently $5.43 million. However, assuming that the first deceased spouse leaves his or her estate to the other spouse, the second spouse may die with a larger, combined estate that exceeds the exemption, and the estate may be subject to tax.
A credit shelter trust is a tool to address the situation described above. Like any trust, a credit shelter requires a settlor, the person who provides the money or property; a trustee, the person or entity that manages the trust; and a beneficiary, the person who receives distributions from the trust. Conveying one’s estate to a credit shelter trust removes it from probate and estate tax liabilities.
With a credit shelter trust, the first spouse to die is the settlor, and his or her estate is conveyed with the surviving spouse named as the beneficiary. This allows the surviving spouse to use the trust assets without adding those assets to the surviving spouse’s estate. When the second spouse dies, children or other designated individuals replace the second spouse as beneficiary of the trust. The first spouse’s estate is still exempt from the estate tax if it is below the exemption amount, and the second spouse’s estate is exempt as well because he or she never took control of the first spouse’s estate.
A credit shelter trust may allow a married couple with significant assets to protect their money from unnecessary taxes. A couple with a large estate may want to consult with a lawyer to see if a credit shelter trust might allow them to avoid or minimize estate taxes upon either spouse’s death.