• Law Office of Christopher R. Chicoine

What's a Credit Shelter Trust?

As of 2021, the federal estate and gift tax exclusion is $11.7 million per individual (that's over $23 million per couple), which is set to expire December 31, 2025. Although Washington lacks an estate tax, it does impose a state death tax for estates larger than $2.193 million. For married couples (must be U.S. citizens), an effective tool to minimize federal estate and/or state death taxes has been a credit shelter trust (a/k/a "AB Trust", "Bypass Trust" or "Marital Trust").

In a nutshell, a credit shelter trust is an irrevocable trust that's created upon the death of the first spouse naming the surviving spouse as its beneficiary. This trust is typically funded up to the exclusion amount so as to avoid an estate tax on the first spouse's death. The remaining assets not placed in the credit shelter trust go to a different trust. Because of the marital deduction, there is no tax on the transfer of the remaining assets for the benefit of the surviving spouse. The idea is to reduce the size of the estate of the last spouse to survive so as to avoid or minimize estate and/or state death taxes.

Illustration: Assume a married Washington couple has a combined estate of $4 million. They don't create a credit shelter trust. When the husband dies, everything goes to the wife. Although there would be no state death tax on the transfer of the husband's $2 million share to his wife, the wife's estate would be subject to a significant state death tax assuming she leaves an estate of $4 million.

If this couple would have created a credit shelter trust funded by the husband's $2.193 million state exemption upon his passing, there would be no state death tax upon the death of the wife as her estate would presumable fall below the $2.193 million threshold. This is because her estate would not include the assets transferred to the credit shelter trust created upon the husband's death.

4 views0 comments