What is a Credit Shelter Trust?

This is probably the most popular type of arrangement for married couples with substantial estates.  It provides that at the death of the first spouse, his/her estate will be split into two parts.  One part, equal to the estate tax exemption amount ($3,500,000 in 2009) would go into a Trust so it would not be included in the surviving spouse’s estate.  This is known as a Credit Shelter Trust.  The rest of the estate of the first to die would go to the surviving spouse tax-free due to the marital deduction.  Thus, there would be no Federal Estate Taxes at the first death and the exemption amount from the first spouse would be kept out of the estate of the second.

While Trusts are not needed to get the tax benefit, they are commonly used.  That is, you could leave the exemption amount directly to the children and the rest to your spouse.  But, Trusts can provide money management, ceditor protection, ongoing tax benefits and flexibility.  For Example, the credit shelter trust could pay all income to your spouse and your souuse could have the right to withdraw 5% of the principal per year, without causing that trust to be inlcude din the spouse’s estate. The Trustee could also have the discretion to use principal for your spouse’s health, education, maintenance and support.  Or, the Trustee could be given additional options to benefit your children.