Credit Shelter Trust are a type of trust that allows a married investor to avoid estate taxes when passing assets on to their heirs. The trust is structured so that upon the death of the investor, the assets specified in the trust agreement (up to a specified maximum dollar value) are transferred to the beneficiaries named in the trust (normally the couple’s children).
A key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.
In certain circumstances, such as the need to fund healthcare expenses, the surviving spouse may even tap into the principal of the trust assets, not just their generated income. When the surviving spouse eventually dies, the assets are transferred wholly to the beneficiaries (children) without any estate taxes levied. This can amount to significant tax savings and can be very valuable, especially considering that the surviving spouse essentially maintains full use of the assets while they are in the trust anyway.
Usually, this type of trust is funded via assets that are adequate to fully utilize the federal estate tax exemption, which is often called the applicable exclusion amount of $3.5 million of the first spouse to pass away. The credit shelter trust may be funded during the lifetimes of the spouses, or at the time of death of the first spouse to die. A surviving spouse may be given restrictive access and control over the assets in the credit shelter trust. The trust can be set up to give the surviving spouse an annual income that is earned by the trust, to withdraw $5,000 or five percent of the trusts’ principal for any reason that he or she sees fit, to use the trusts’ principal when necessary for health, support, education, or maintenance.
Many couples fail to realize the true worth of their estate and thus don’t properly plan their estates and take advantage of the credit shelter trust. Once you factor in payouts from life insurance policies, homes and real estate investments, as well as other assets, your estate can quickly skyrocket to the $3.5 million range. Talk with us to find out if the credit shelter trust is right for your financial future.