A credit shelter trust is an estate planning strategy used to reduce or eliminate a legally-married couple’s federal estate tax burden.
Upon the death of the first spouse, an amount of the that spouse’s separate and community property assets, assets in cumulative value not exceeding the current effective federal estate tax exemption are used to fund a decedent’s, or credit shelter, trust.
While the surviving spouse is alive, he/she generally can receive distributions from the credit shelter trust which are made subject to an “ascertainable standard” , for example his/her “health, education, maintenance, and support”.
Upon the death of the second spouse, the value of the assets in the credit shelter trust are not included in the surviving spouse’s estate for federal estate tax purposes.
Although the amount of the effective federal estate tax exemption in the United States, which is more than $10 million (indexed for inflation) for legally-married couple as of 2014, in conjunction with statutory portability, largely eliminates the need to maximize the federal estate tax exemption for most Americans, credit shelter trusts, and variants thereof, can provide other benefits.
This brief overview of some important considerations associated with credit shelter trusts is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.