Credit Shelter Trust- Avoid Estate Tax

There are many different kinds of trusts. One of the most popular is called a credit shelter trust. The point of this trust is primarily to avoid paying estate taxes. Remember that under current law when you die, your first $5 Million is exempt from estate taxes. But what if you started saving early, lived frugally, and watched your savings accumulate to well more than $5 Million? Let’s say $8 Million. Are you hosed? Not if you are married and use a credit shelter trust. Remember that both you and your spouse get a $5 Million exemption. If you just leave all your money to him when you die, then when he dies that $3 Million above and beyond the $5 Million exemption is taxed (at a rather high rate too, I might add.) That’s obvious less than ideal. Why pay tax you don’t have to pay?

The solution is a credit shelter trust, also known as a bypass or a family trust.  Here’s how it works.  Let’s say you die first.  $5 Million goes into a credit shelter trust, which encompasses YOUR $5 Million exemption (or credit., which is now “sheltered”.)  So now there’s $5 Million in the trust and your spouse has $3 Million to live on.  If that isn’t enough, the income from the trust can also be directed toward spousal support.  When your spouse dies, the trust is dissolved and its contents are distributed to the heirs.  Then the spouse’s $3 Million is passed on to the heirs as well, all estate tax-free.

Obviously, this only applies to a small number of Americans, those with estates between $5 Million and $10 Million. But remember that it was just a couple years ago that the exemption was only $1 Million.  There were many physicians whose net worth at death was between $1 Million and $2 Million.  I’m sure there’s a few with over $5 Million at death now.  Something to consider when doing estate planning, but obviously not something a resident or a new grad needs to be spending much time on.

Learn more about estate planning here.