Credit Shelter Trusts
CREDIT SHELTER TRUSTS (FAMILY & MARITAL TRUSTS/A-B TRUSTS) (Minimizing Estate Taxes for Married Couples)
Estate taxes can also be reduced or eliminated through the use of trusts. A credit shelter trust (which is also known as an A-B Trust or a Family and Marital Trust) should be utilized for married couples who own property in excess of the applicable estate tax.
Although a spouse can receive an unlimited amount of property without being subjected to estate taxes, the surviving spouse’s estate could balloon to an amount well above the applicable exclusion rate when he or she passes away. This can create an estate tax of nearly fifty percent for any funds in excess of the applicable exclusion amount.
An appropriate estate plan will often utilize a marital and family trust to take advantage of each spouse’s individual estate tax exemptions.
Example 1: Assume the applicable exclusion amount this year is $1,000,000 and the applicable estate tax that year is 50%. If one spouse dies and has $2,000,000 this year he or she may leave that entire amount to his or her spouse without paying estate tax. (You can leave an unlimited amount of assets to your spouse without paying estate tax). However, if the second spouse dies later in this year and has $2,000,000, $1,000,000 would be subject to estate tax. Therefore, $1,000,000 would be subject to an estate tax of 50% and $500,000 in estate taxes would be paid.
Example 2: However, if the first spouse had $2,000,000 and had utilized a credit shelter trust, $1,000,000 could pass to the surviving spouse (in a marital trust) and $1,000,000 would go into a family trust. If the surviving spouse passed away that year, then $2,000,000 would pass to the beneficiaries estate tax free (avoiding $500,000 in estate taxes).