Minimize Estate Taxes With A Credit Shelter Trust

Married couples with significant assets may be able to minimize or even eliminate estate taxes by creating a credit shelter trust, also referred to as an A/B trust or a bypass trust. Essentially, these trusts accomplish two goals: ensuring that your spouse can maintain his or her lifestyle after your death and shielding your wealth from the estate tax so your children receive as much as possible.

Understanding The Estate Tax Exemption

Whether you should consider a credit shelter trust depends mostly on the value of your and your spouse's combined estates. For 2016, the federal estate tax exemption is $5.43 million. That means if your combined net worth is less than $5.43 million and one of you passes away this year, you would be unaffected by estate taxes. Keep in mind that what really matters is your net worth at death, not today. There is a possibility that by the time of your death your estate will exceed the exemption amount.

How Does A Credit Shelter Trust Work?

Like many estate planning techniques, those involving credit shelter trusts quickly become complex. However, here is a simple example designed to illustrate how these trusts operate and why they are useful. For this example, imagine that you and your spouse each have $7 million estates.

  • Without a credit shelter trust or portability: You both leave everything to each other. You die. Your spouse pays no estate taxes this year because of the marital deduction. Now your spouse has a $14 million estate. Your spouse dies while the estate tax exemption is $5.43 million. That means his or her estate will owe federal & state taxes on $8.57 million ($14 million estate minus the $5.43 million exemption), approximately $3.4 million.
  • Without a credit shelter trust but with portability: The facts are the same as in the first example. Because of the marital deduction, none of the estate tax exemption is used on the first death. Because of portability, on the death of the surviving spouse, the second estate has the benefit of the first estate's unused tax-exempt amount, $5.43 million in addition to its own, for a total tax-exempt amount of more than $10 million. The net estate taxes will be less than $3 million.
  • With a credit shelter trust and no portability: Rather than your estate going directly to your spouse when you die, $5.43 million of your assets go into a credit shelter trust. The balance of your estate — $1.57 million — is distributed to your spouse and qualifies for the marital deduction. The trust provides income to your spouse for life, and anything that is remaining in the trust when he or she dies goes directly to your children, with estate taxes of less than $2 million.
  • With a credit shelter trust and portability: The tax-exempt amount will be used in its entirety on the estate of the first spouse to die, and when combined with the marital deduction, there will be no federal estate tax in either estate. New Jersey estate taxes paid by both estates will total approximately $1.3 million.

In essence, your assets "bypass" your spouse's estate and go into the trust instead. Hence, the name "bypass trust." The maximum amount you can place in these trusts is the exemption amount — $5.43 million in 2016.

As New Jersey has its own estate tax on taxable estates in excess of $675,000, if a credit shelter trust is funded to the maximum of $5.43 million, there will be a New Jersey estate tax of approximately $430,000.

How The Law Firm of J. Jeffrey Press, P.A., Can Help

As you can see, credit shelter trusts are complex, even in the most straightforward situation. As an asset protection lawyer with more than 35 years of experience, J. Jeffrey Press is able to create comprehensive plans that accomplish your goals. Our firm is well-equipped to advise you on all aspects of estate planning and taxation, and devise plans that benefit you, your children and anyone else for whom you wish to provide following your death.

Get More Information About Credit Shelter/Bypass Trusts in New Jersey

Schedule a consultation with an estate planning attorney at the law office of J. Jeffrey Press, P.A., in Parsippany. Please call 973-323-2654 or contact us online.