Credit Shelter Trusts
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.
Estate taxes at both the state and federal level apply to decedent’s estates with a value that exceeds a certain threshold amount. For federal estate taxes, the filing threshold for 2012 is $5,000,000, and will go down to $1,000,000 in 2013 unless the law is amended before then.
Because assets below this filing threshold are not taxable, these amounts are also referred to as the “exclusion amount.” For the State of Washington, the exclusion amount is $2,000,000, with substantial additional deductions available for qualified farmland and farming equipment.
For both state and federal tax purposes, a decedent may leave an unlimited amount of assets to his or her qualified spouse, tax free, without relying on the state or federal exclusion amounts referenced above. However, this can result in unnecessary estate taxes being due on the estate of the second spouse to die. To reduce or eliminate this tax liability, couples may incorporate a Credit Shelter Trust into their estate plan. Upon the death of the first spouse, the Trust is created for the benefit of the surviving spouse, and assets in the Trust are not part of the surviving spouse’s taxable estate. Upon the death of the surviving spouse, the remaining Trust assets pass directly to contingent beneficiaries, such as children or grandchildren.
So long as the state and federal exclusion amounts are not equal, the assets originally placed in a Credit Shelter Trust from a deceased spouse’s estate may be subject to state or federal estate tax if they exceed either exclusion amount. However, it should be possible to defer payment of the tax until after the death of the surviving spouse, by making what is known as a QTIP election.
If you have any questions or would like to schedule an appointment, please call us at (425) 455-5513, toll free at (877) 455-5513, or info@palmerlegal.com.