Here’s what to know about records to hang on to and how long you should keep them.
What is a credit shelter trust?
A credit shelter trust is a way that spouses can reduce federal estate tax liabilities after either or both of them have passed away. This trust is useful when the value of the joint estate exceeds the estate and gift tax exemption totals, which for 2017 is $5.49 million per individual and $10.98 million per married couple.
Under current tax law, the Internal Revenue Service (IRS) allows unused portions of estate tax exemptions to be passed from a deceased spouse to the surviving one. When the surviving spouse dies, the total estate is considered for estate tax. If it exceeds the married couple exemption of $10.98 million, an estate tax of 40 percent is payable on the excess. This is known as portability.
If the couple has established a credit shelter trust that nominates their children as beneficiaries, when the first spouse dies, the assets specified in that trust pass onto the beneficiaries. But while the surviving spouse is alive, he or she has free use of these assets. In certain circumstances, the surviving spouse is allowed to liquidate assets.
Setting up a credit shelter trust is complicated, and it’s essential the language used complies with IRS requirements. To ensure a credit shelter trust achieves its goals, an experienced estate planning attorney should be consulted. Other trusts that have similar meanings and functions as credit shelter trusts include bypass trusts and AB trusts.
Credit shelter trust example
Daphne and Niles have two sons, Peter and Paul. Thanks to their successful careers, the couple’s joint estate is estimated to be worth $12.5 million and is still growing. Although Daphne will not have to pay estate taxes when Niles dies, their children will likely face a big tax bill when Daphne dies because the joint estate will be greater than the $10.98 million exclusion allowed for a married couple. To minimize future tax obligations for their descendants, they speak to their attorney, who draws up a credit shelter trust.
Do you understand the basics of estate planning? Read Bankrate’s guide to estate planning to find out what you need to do to protect your estate.