The first $11.4 million (in 2019) of an estate is exempt from federal estate taxes, so theoretically a husband and wife would have no estate tax if their estate is less than $22.8 million. No Attorney-Client relationship is created by offering this information. Fortunately, there is no state inheritance tax in California. However, it is not always the best decision in light of changes in the federal estate tax laws that occurred between 2008 and 2012. And upon the surviving spouse's death, the trust's assets are transferred to the remaining beneficiaries without any estate taxes levied. Website by, Minimize Your Washington Estate Taxes with a Bypass Trust. Credit Shelter Trusts. A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring estate taxes. This means that if the first spouse to die does not use all of his or her $11.58 million exemption, the estate of the surviving spouse may use it (provided the surviving spouse makes an “election” on the first spouse’s estate tax return). This means that if the first spouse to die does not use all of his or her $11.18 million exemption, the estate of the surviving spouse may use it (provided the surviving spouse makes an “election” on the first spouse’s estate tax return). Subscribe to Elder Law When the surviving spouse dies, any part of the estate over that threshold will be subject to estate tax. Here are a few: it shields funds in trust from creditors; it protects children’s inheritance if the surviving spouse remarries; it protects children from a prior marriage; it helps avoid administrative headaches; and, we never know what Congress will do about the estate tax down the road. If you are on a personal connection, like at home, you can run an anti-virus scan on your device to make sure it is not infected with malware. In effect, the couple has lost the state’s “unified credit” of the first spouse to pass away. Upon the death of the surviving spouse, the remaining Trust assets pass directly to contingent beneficiaries, such as children or grandchildren. However, the transfer boosts the wife's net income to $12 million and past the estate-tax exemption. Updates. Credit shelter trusts are designed so that couples can take full advantage of estate tax exemptions. As such, it's generally only applicable in cases of multimillion-dollar estates. Many states have an estate or inheritance tax and the thresholds are usually far lower than the current federal one. Credit shelter trusts are designed to maximize use of the deceased’s applicable credit against the Federal estate tax, which would otherwise remain unused and ultimately result in greater taxation of the married couple’s combined estates. Cloudflare Ray ID: 5dbd200a19100610 But because these assets were held in the trust outside of her control, her taxable estate is still valued at $6 million and still within the estate-tax exemption. Then, one can create, in the trust amount, Credit Shelter Trusts in the names of each spouse. There are a number of different kinds of trusts, but they fall into two basic categories: testamentary and inter vivos. All rights reserved. When the surviving spouse dies, his or her estate will include his or her separate assets and what is left in the marital trust but will not include property put into the credit shelter trust. The rest of the deceased spouse’s estate is allocated to a QTIP (qualified terminable interest property) or marital trust. State and federal Credit Shelter Trusts and federal portability 1. Do We Need A Credit Shelter Trust? The offers that appear in this table are from partnerships from which Investopedia receives compensation. We had specific requests that he happily met, and exceeded them every time. Standard estate tax planning is to split an estate that is over the prevailing state or federal exemption amount between spouses and for each spouse to execute a trust to “shelter” the first exemption amount in the estate of the first spouse to pass away. A Credit Shelter Trust, also known as a Bypass Trust, is by far the most common Trust used by married couples to reduce or even eliminate state and federal estate taxes. The use of a credit shelter trust, utilizing a decedent's federal exemption amount, is common. Under specific circumstances such as the need to fund certain medical or educational expenses, the surviving spouse can tap into the trust's principal and not just the income. These estates are known as A trust and B trust. The first share is equal to the Washington State estate tax exemption at the time of the first spouse’s death. Couples would do well to have their revocable trusts that contain credit shelter provisions reviewed by a competent professional. Therefore, the transfer does not add to the surviving spouse's taxable estate. Looking at just the federal exemption of $11.4 million (in 2019) and the ability for the first spouse to die to transfer his or her unused credit to the other spouse, it would appear that the couple would have no tax issues if their estate is under $11.4 million. sole, property held in trust: RCW 24.12.030. Even if your state has no estate or inheritance tax, there are other reasons to have a credit shelter trust. I am very happy with the work he did for me. Here are a few: it shields funds in trust from creditors; it protects children’s inheritance if the surviving spouse remarries; it helps avoid administrative headaches; and, we never know what Congress will do about the estate tax down the road. ©2020 The Estate Planning Law Center, All Rights Reserved, Reproduced with Permission Privacy PolicyWebsite Built by Foster Web Marketing Website Powered By Dynamic Self-Syndication (DSS™)Site MapDSS Login, Call 818-292-8160 or 310-230-5686 to schedule your initial consultation and have estate planning attorney Richard M. Seff answer your most pressing questions at no cost to you. Investopedia uses cookies to provide you with a great user experience. After the husband dies, his $6 million estate and any income it generated passes estate-tax free onto his wife because it falls below the federal exemption. Suppose a husband and wife who have been married for several years each accumulates an estate worth $6 million and the husband sets up a credit shelter trust to be funded upon his death with his share of their combined estate. Many wills used formula clauses that might create more taxes or over fund the “Family Trust” (AKA By-pass or Credit Shelter Trust). 1,000,000. A Credit Shelter Trust is designed to allow affluent couples to reduce or completely avoid estate taxes when passing assets on to heirs, typically the couple's children. I now have peace of mind with a trust document that is very well organized and easy to follow. A Credit Shelter Trust, also known as a Bypass Trust, is by far the most common Trust used by married couples to reduce or even eliminate state and federal estate taxes. This plan removes the amount in the credit shelter trust from the surviving spouse’s estate and utilizes the deceased spouse’s exemption to avoid paying tax on the amount in the credit shelter trust. You should consult with a lawyer directly if you need specific advice or guidance regarding any legal matter or question. Richard worked with me in updating a trust that had been done years ago. Estate taxes at both the state and federal level apply to decedent’s estates with a value that exceeds a certain threshold amount. An inter-vivos is a fiduciary relationship used in estate planning that is created during the lifetime of the trustor. The primary purpose is to shelter the deceased spouse’s available credit against the estate tax. However, if one spouse dies and leaves everything to the surviving spouse, the surviving spouse may have an estate that is greater than $11.58 million plus whatever is left over from the deceased spouse's exemption, or an estate that is higher than the applicable threshold in his or her state (assuming the state has an estate or inheritance tax). Firm Name The deceased spouse’s personal representative claims the estate tax marital deduction for the marital trust and it passes to the surviving spouse tax free.