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Credit Shelter Trusts

Every person has to pay taxes; the only tax in the tax code that can significantly be reduced or eliminated, with the help of an estate planning attorney, is the estate tax. A credit shelter trust is a way to take full advantage of your state estate and federal estate tax exemptions. Although such trusts may appear needless unless you are a multi-millionaire, there are still reasons for those of more modest means to do this kind of planning, and some of the main reasons are Medicaid avoidance and Medicaid planning and estate tax avoidance.

Even if your estate is valued at less than one million dollars, there are other reasons to have a credit shelter trust.  Here are a just a few:

  1. A Credit Shelter Trust can shield funds in trust from creditors.
  2. A Credit Shelter Trust may be a viable tool in Medicaid Planning for In Home Care Medicaid and Long Term Chronic Care Nursing Home Medicaid Planning.
  3. A Credit Shelter Trust can protect children’s inheritance if the surviving spouse remarries.
  4. A Credit Shelter Trust helps avoid administrative headaches.
  5. With estate planning that is currently done you are usually grandfathered in, with regards to today’s laws (just in case the laws change in the future). Taking care of your estate planning today could protect your estate from the uncertainty of governmental policy changes in the future, we never know what Congress will do about the estate tax down the road.

By now you should certainly be use to paying taxes during your lifetime, but without proper estate planning you may also be taxed even after you die. Moreover, it’s possible for your whole estate that you leave behind to be taxed not once, but twice!

The first $5.34 million (in 2014) of an estate is exempt from federal estate taxes, so theoretically a husband and wife would have no federal estate tax if their estate is less than $10.68 million. The estate tax is also “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5.34 million exemption, the estate of the surviving spouse may use it (provided the surviving spouse makes an “election” on the first spouse’s estate tax return).

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However, if one spouse dies and leaves everything to the surviving spouse, the surviving spouse may have an estate that is greater than $5.34 million plus whatever is left over from the deceased spouse’s exemption, or an estate that is higher than the applicable threshold in his or her state (assuming the home state of the estate has an estate or inheritance tax). When the surviving spouse dies, any part of the estate over that threshold will be subject to federal estate tax and state of domicile estate tax. In other words, without proper planning the exemption of the first spouse to die is lost.   The way to preserve both spouses’ exemptions has been to create a “credit shelter trust” (also called an A/B or bypass trust).  Work with a reputable estate planning and elder law firm to make sure that that your credit shelter trust is structured correctly.  The attorneys at Castiglia-Rubinstein & Associates are not only trained in handling simple credit shelter trust for estate administration under the current state estate tax laws and federal estate tax laws, will and probate administration matters, we take care of complex will and living trust estate tax matters in Nassau County, Suffolk County, Queens County, Bronx, Westchester, Richmond County, Manhattan and Brooklyn Kings County New York.

Many states have an estate or inheritance tax and the thresholds are usually far lower than the current federal one.  Let’s say that a couple lives in State Y, which has retained an estate tax on all estates over $1 million (this is the state’s exemption).  Looking at just the federal exemption of $5.34 million and the ability for the first spouse to die to transfer his or her unused credit to the other spouse, it would appear that the couple would have no tax issues if their estate is under $10.68 million. However, if the first spouse on his death passes everything to the surviving spouse, she may end up with an estate well over the state’s $1 million threshold and be subject to a substantial state tax upon her own death. In effect, the couple has lost the state’s “unified credit” of the first spouse to pass away.

Standard estate tax planning is to split an estate that is over the prevailing state or federal exemption amount between spouses and for each spouse to execute a trust to “shelter” the first exemption amount in the estate of the first spouse to pass away.  While the terms of such kinds of trusts vary for each and every family’s specific assets and situations, they generally provide that the trust income will be paid to the surviving spouse and the trust principal will be available at the discretion of the trustee if needed by the surviving spouse. Since the surviving spouse does not control distributions of principal, the trust funds will not be included in his/her estate at his/her death and will not be subject to tax. This way, in State Y the couple can protect up to $10.68 million from estate taxation while still making the entire estate available to the surviving spouse if needed.

The rising federal estate tax exemption means that many older trusts drawn up for married couples contain outdated estate-splitting provisions that may cost them dearly in lost state taxes or lost federal estate taxes, or both. Couples would do well to have their revocable trusts that contain credit shelter provisions reviewed by a competent estate and elder law attorney.  The lawyers at Castiglia-Rubinstein and Associates are there for you and your family.

Death and taxes may be unavoidable, but there are ways to make them less burdensome to your loved ones. Thoughtful estate planning in the form of a credit-shelter trust can help alleviate those burdens.

A credit shelter trust is a type of marital deduction trust (also called a marital trust), along with the QTIP trust and the Life Estate with Power of Appointment.  Any marital deduction trust is designed to make optimal use of the marital deduction provided by federal estate tax laws, which allow property passing from a decedent to a surviving spouse to be transferred tax-free.

QTIP is short for Qualified Terminable Interest Property Trust. The concept of a “QTIP trust” only exists for federal gift and estate tax purposes, and from a state law perspective, such a trust does not differ from any other trust except that it must meet the requirements of the Internal Revenue Code. States which levy an estate tax may also recognize the trust.

For example, if a Mom gives $75,000 to Dad, this would be a gift to a spouse, exempt from the gift and estate tax. However, if Dad were to give the $75,000 to his son, this would be included for gift and estate tax purposes. However, Dad can place this $75,000 in a QTIP trust which will make payments of money to Mom during her life, and have the money in the trust pass to their Son when Mom dies. This is treated as a marital gift to Mom, exempt from the gift and estate tax, to the extent of any property received. The amount passing to their Son upon the death of Mom will be included in Mom’s estate for estate tax consideration.

A credit-shelter trust (also known as an A-B trust, a bypass trust, or an exemption equivalent trust) is a way for you to pass on your estate and to avoid estate taxes. Under a credit-shelter trust, your surviving heirs would not receive your property (which would then be subject to an estate tax).  Instead, your heirs would receive an interest in the trust itself.

A credit shelter trust is particularly useful for spouses whose estates would exceed the exemptible amount allowed for estate taxes. By leaving property to each other in a credit shelter trust, couples avoid having the same property taxed twice. Typically, the estate would be taxed once on the death of the first spouse (who leaves the estate to the surviving spouse), and then taxed again on the death of the surviving spouse.

However, if the property were not held in a “bypass” trust at the time of the first spouse’s death, the property would pass to the surviving spouse as surviving joint tenant and thus would not be subject to taxation.  Specifically, under a credit shelter / bypass trust, each spouse has a document that creates a trust to be established after the death of the first spouse. It is important that each spouse have a document naming the other spouse as the beneficiary because of the uncertainty of who will die first. Thus, in a bypass trust, instead of joint ownership (or tenancy by the entirety), the husband and wife would divide their assets so they each have a separate “taxable” estate. This is known as an AB trust. Under an AB trust, when the first spouse dies, the trust is split into two separate trusts: Trust A will contain the property of the first spouse to die, and Trust B will hold the property of the surviving spouse. When the first spouse dies, the property in Trust A goes to named beneficiaries.  However, the surviving spouse usually retains the right to use the property for life. When the surviving spouse dies, the property in Trust B passes to the beneficiaries.  Importantly, the Trust B property is not considered part of the second spouse’s estate for estate tax purposes. It “bypasses” the survivor’s estate at his or her death. Even though the assets in the bypass trust are “taxed” for estate tax purposes at the first spouse’s death, no tax is due because of that spouse’s exemption. And if the first spouse had an estate whose value exceeds the exemption amount, the surplus may be left to the surviving spouse tax-free under the marital deduction.

We are dedicated to your success, so contact us today.  Speak with one of our knowledgeable Long Island will and estate tax planning, credit shelter trust estate planning, living trust estate administration and or litigation attorneys today from wherever you are in New York in Nassau and Suffolk, Brooklyn, Kings and Queens Counties, on Long Island and all New York City boroughs including Bronx, Westchester, Richmond County, and Manhattan.

Call 1-800-960-1529 today.

Get Help With Your Estate Plan Now be prepared for your loved ones with the proper estate plan. Avoid costly mistakes with state estate tax and federal estate tax by speaking with an attorney from the law offices of Castiglia Rubinstein and Associates.

You should know you have certain legal rights and must be very selective of the lawyer or law firm that you chose to represent you. Have an attorney council you on the right decision for you and your family.

Trust vs WillsRemoval of a Trustee * Guardianship * Probate * Beneficiary Rights
Medicaid Asset Protection * Probate Litigation * Estate Litigation * Living Trusts
In Home Care * Supplemental Needs Trusts  * Fraudulent Transfers

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