redit Shelter Trust (CST)

A credit shelter trust is sometimes referred to as a Bypass Trust, B Trust, or Family Trust. The CST is intended to allow a married couple to take full advantage of the lifetime exemption for estate taxes and minimize federal, and state, estate tax on their combined estate.

By implementing a CST, married couples are insuring that both lifetime estate tax exemptions are used, essentially doubling the amount they can pass to their heirs estate tax free.

How It Works:
A Credit Shelter Trust may be funded during the lifetimes of the spouses or upon the death of the first spouse. The trust is funded up to the federal estate tax exemption that is in effect.

After the first death the surviving spouse may be given restrictive access and control over the assets in the trust. This can be done by setting up the trust so the surviving spouse has access to annual income that is earned by the trust.

The surviving spouse can withdraw the greater of $5,000 or 5% of the trusts principal for any reason that they see fit. In addition, the surviving spouse can access the trusts’ principal when necessary for the purpose of health, education, maintenance and support.

The assets inside the CST and the growth of those assets will go to the married couples beneficiaries at the death of the second spouse, federal estate tax free. The assets inside the CST will be protected from creditors as well.

THE SURVIVING SPOUSE CAN WITHDRAW THE GREATER OF $5000 OR 5% OF THE TRUSTS PRINCIPAL FOR ANY REASON THAT THEY SEE FIT. IN ADDITION, THE SURVIVING SPOUSE CAN ACCESS THE TRUSTS’ PRINCIPAL WHEN NECESSARY FOR THE PURPOSE OF HEALTH, EDUCATION, MAINTENANCE AND SUPPORT.

Creation:
Credit shelter provisions can be included in a will, or as part of a revocable living trust. Keep in mind that each spouse needs to have assets in his or her own name. Assets that are held “jointly with the right of survivorship” pass to the surviving joint tenant by operation of law and generally are not used to fund a credit shelter trust.

Clients should work with their estate planning attorney to draft appropriate documents and review asset ownership to fully utilize the estate tax saving of this strategy.