Credit shelter trusts are an estate planning tool for protecting assets from creditors, moving assets out of the estate to avoid probate and adding another layer of protection to a deceased spouse’s wishes. Only married couples can use credit shelter trusts, according to a recent article explaining it all: “How Does a Credit Shelter Trust Work?” from Yahoo! Finance.

The main reason to use a credit shelter trust is to minimize federal estate taxes on assets in the estate. Also known as “wealth transfer taxes,” the federal estate tax has been around since 1916. Estate tax rates are very high. Wealth more than $1 million over the exemption rate is taxed at 40%. While today’s federal estate tax exemption is very high—$11.7 million for individuals and $23.4 million for couples—it is generally understood that these numbers are not likely to remain at these historic levels. The current estate tax exemption expires in 2025, unless Congress acts to reduce it earlier.

Estate tax law changes often both at the federal and the state level, so estate planning attorneys continually track these changes to protect their clients.

The credit shelter trust, also known as a bypass trust, B trust, exemption trust or a family trust, is an irrevocable trust. As with all trusts, it is a contract between the trustor—the person who creates and funds the trust—and the trustee—the person in charge of the trust. The trust may contain any type of property, from cash, stocks, bonds and real estate to collectibles and artwork.

The credit shelter trust becomes effective upon the death of one of the spouses. Assets in the trust are not included in the estate of the surviving spouse. Depending upon the terms of the trust, these assets may pass to beneficiaries after the first spouse passes without incurring any tax liabilities. Alternatively, as long as the surviving spouse lives, they may receive income from assets in the trust.

The credit shelter trust also protects the wishes of the decedent spouse. The trust document can be used to direct that some or all of the assets of the first spouse to die shall pass to the children of a first marriage or other specific beneficiaries.

Credit shelter trusts are one of many tools that can be used for estate planning. They have the added benefit of protecting assets from creditors and maintaining the family’s privacy, since assets in trust do not go through probate. Your estate planning attorney will know which kind of trust is best for your unique situation.

One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation.  Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security.  Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.

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Reference: Yahoo! Finance (Aug. 16, 2021) “How Does a Credit Shelter Trust Work?”