The Credit Shelter Trust — Still An Important Tool


Gregory J. Pond

In maximizing the portion of your estate that passes to the next generation(s), a credit shelter trust remains a valuable planning tool.  A credit shelter trust, or bypass trust, allows for a married couple to reduce federal and state taxation on their combined estate by taking full advantage of the exemption for estate taxes. The federal estate tax exemption is $5 million per person (plus inflation adjustments).  Many states have an estate tax with a much lower exemption.  For example, New York has a $1 million exemption (with no inflation adjustments).

So, how exactly does one set-up a credit shelter trust?

The credit shelter trust is usually established in your will. Typically, the surviving spouse is a permissible credit shelter trust beneficiary.  The will provides a formula so the credit shelter trust receives an amount equal to the available estate tax exemption.  Then, the rest of the estate can be passed to your spouse without any taxation. Assets placed in the credit shelter trust are not subject to estate tax at the surviving spouse’s death, including all growth during the surviving spouse’s lifetime.

What else do I need to consider?

Be sure that when you estimate your potential estate for estate tax purposes, you factor in life insurance policies, home values, real estate investments, and closely-held businesses. You may be surprised that your assets exceed the applicable estate tax exemption.  If you’re not sure where to begin or if you need assistance, please reach out to our estate planning team and we’d be happy to walk you through the process, as well as answer your questions about federal and state estate tax exemptions, laws governing credit shelter trusts, and related estate planning considerations.

Don’t leave your loved ones with a smaller inheritance because of poor or incomplete planning.  See Certilman Balin’s Estate and Tax Planning team about setting up a will with a credit shelter trust today.