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What is a credit shelter trust?

| Jan 13, 2021 | Trusts & Trust Administration |

New Jersey residents can potentially minimize future estate tax with a credit shelter trust. This trust allows your surviving spouse to inherit the trust and pass it along to your children when he or she dies without incurring tax.

If you have estate planning on your to-do list, review the benefits of this type of trust.

Understanding estate tax

You can completely avoid federal estate tax if your estate holds less than $11.7 million per individual or 23.4 million for a married couple as of 2021. However, the New Jersey estate tax threshold is much lower than the federal threshold at $2 million, which means many residents still have to pay state tax on inheritance from family members.

Establishing a credit shelter trust

With this estate planning tool, you and your spouse create a trust and transfer assets to the ownership of the trust. When one of you dies, the other will be able to access the funds in the trust for certain purposes while retaining the tax exemption for your children when he or she dies. Because of its structure, some people refer to a credit shelter trust as a bypass trust.

The assets in the trust benefit from the gift tax exemption. In addition, the surviving spouse’s sole assets are not subject to New Jersey estate tax unless they exceed $2 million in value.

As with any estate planning vehicle, reviewing the benefits and drawbacks of a credit shelter trust can help you understand whether it makes sense for your financial situation and goals.