You and your spouse have worked hard to build your wealth for your family. When you pass away, you want to make sure that your children receive the full value of what you have earned. A credit shelter trust can help make sure your children don’t lose a large chunk of inheritance to taxes.
A credit shelter trust is one way to prevent or reduce estate taxes for married couples. When one spouse dies before the other, a credit shelter trust prevents the estate from qualifying for estate taxes.
How a credit shelter trust works
Married couples who use credit shelter trusts split their estate into two. Each spouse takes ownership of half the estate. When one spouse passes away, the estate assigned to that spouse goes into an irrevocable trust.
The estate in the trust transfers to the surviving spouse, but a trustee takes control of the assets in the trust. If the trust earns income, that goes to the surviving spouse, and the surviving spouse can even take out funds for certain emergencies. But when the surviving spouse passes away, the IRS does not consider what is in the trust to be part of the second spouse’s estate.
Avoiding estate taxes
This can be helpful for a couple with an estate that surpasses the federal limit for estate tax. The federal estate tax limit is currently $10 million for an individual and $20 million for spouses. However, when one spouse dies before the other, the estate of the surviving spouse qualifies for the individual limit. A credit shelter trust can help avoid taxes for couples who together have an estate worth more than the individual limit but less than the spouse limit.
Part of a good estate plan
If you have an estate worth a lot, you want to protect it from taxes. A credit shelter trust can be part of a good estate plan that makes sure your children receive the full value of your estate.