The estate tax exemption and credit shelter trusts

Stephen Cockriel June 25, 2015

Couples in California with considerable assets may be looking to take advantage of the federal estate tax exemption that allows currently allows each person in a married couple a $5.43 million exemption. However, the problem with this exemption is that if one spouse dies before the other and the deceased spouse's estate rolls over into the surviving spouse's estate, the surviving spouse's estate may balloon to a size that exceeds the exemption.

This is where a credit shelter trust comes in. With a credit shelter trust, a surviving spouse can benefit from the assets of the other spouse without ever taking possession of those assets. As a result, the assets are never rolled into the surviving spouse's estate.

Both spouses can set up a credit shelter trust, and when one spouse dies, the decedent's assets will automatically go into the trust. A trustee then administers the trust on behalf of the beneficiary who is usually the surviving spouse. The spouse receives the income from the estate, and on that spouse's death, the trust assets pass to other beneficiaries. The surviving spouse's portion of the estate is still eligible for the estate tax exemption, but the assets that are in the trust are deemed to be separately owned by the trust and thus not part of the estate for tax purposes.

Even individuals with smaller estates who do not need to be concerned about the estate tax exemption may benefit from trusts. In addition to a credit shelter trust, there are trusts that can be set up to provide for minor children until they come of age. Other types of trusts can be established for special needs relatives or others who may need to be taken care of for a lifetime but who an individual feels should not be in charge of managing those assets. An attorney may be able to assist a client with these and other estate planning needs.