What is a Florida Credit Shelter Trust?

credit shelter trust

A credit shelter trust is an essential estate planning tool that can allow married couples to lower or eliminate their federal estate tax obligations when passing their assets to beneficiaries. Importantly, these types of trusts are not just for high-net-worth families. There are several crucial reasons those with a more modest estate might utilize this vehicle as part of a comprehensive estate plan. Not only do credit shelter trusts help to avoid the probate process, but they can ensure the future wishes of the decedent spouse are carried out.

What is a Credit Shelter Trust?

A spouse can pass their assets to the others tax-free due to the unlimited marital deduction in the U.S. Federal Estate and Gift Tax Law. However, a significant tax burden can be placed on the couple’s children upon the death of the second spouse. A credit shelter trust can be used in connection with the unlimited marital deduction for the benefit of the beneficiaries.

Also known as AB trusts or bypass trusts, credit shelter trusts allow each spouse to have a separate taxable estate. It is created upon the passing of the first spouse. The surviving spouse receives a life estate rather than a direct inheritance — the trust can be set up in such a way that the living spouse retains certain rights to access the principal. The couple’s children become the trust beneficiaries when the surviving spouse dies, and the assets are passed without tax ramifications.

These types of trusts are irrevocable, meaning they cannot be altered after they have been created. A settlor cannot take property out of an irrevocable trust once it has been transferred into it. A wide variety of property and assets can be placed into a credit shelter trust, including cash, stocks, bonds, real estate, art, vehicles, and collectibles. Any appreciation in value of the assets in the trust would also pass tax-free.

Advantages of Using a Credit Shelter Trust

Although there is no estate tax in Florida, a credit shelter trust can still be used to safeguard assets from the federal estate tax. The current federal estate tax exemption is $12.06 million — when an estate is valued after someone’s death, any amount exceeding this threshold would be subject to the tax unless otherwise excluded. Married couples have a combined estate tax exemption for 2022 of $24.12 million.

With the highest tax rate at 40% for taxable amounts over $1 million, the economic impact of passing an estate to a decedent’s beneficiaries could be substantial, based upon the value of the estate. However, when assets are placed in a credit shelter trust, they are not considered part of the surviving spouse’s estate and steep financial consequences can be avoided.

Credit shelter trusts are most beneficial when each spouse possesses enough assets to trigger the federal estate tax. In some cases, even smaller estates can benefit from a credit shelter trust in that they can be utilized to do the following:

  • Protect assets from creditors
  • Shield the inheritance of children from a first marriage
  • Streamline the property distribution process
  • Avoid the time and expense of probate
  • Ensure assets remain in the family

Apart from the tax implications, there are several other reasons why the unlimited marital deduction should not solely be relied upon. Notably, without proper estate planning, a decedent would not have any control over how their assets are eventually distributed. For example, a surviving spouse could ultimately remarry and have children with their second spouse. Or, they might have children from a prior marriage. Without using a trust or another estate planning tool, the decedent’s wealth could ultimately be distributed by the surviving spouse in a way they had not intended.

Other Estate Planning Options for Married Couples

Depending on the size of the estate and the couple’s goals, setting up a credit shelter trust might not be practical. There are many different estate planning tools that married couples can use to help reduce their children’s tax burdens, shield their assets from creditors, and satisfy their specific objectives. Spouses can title property jointly with rights of survivorship to avoid probate. A couple might also consider drafting mirror image wills, which leave all assets to the surviving spouse upon the death of the other.

In addition, there are numerous other types of trusts that can be used as part of a tailored estate plan. Each type of trust serves a different purpose and can accomplish a wide variety of goals. For instance, trusts can be created to leave assets to charities, care for pets, and provide funds for a family member with special needs. Other types of trusts recognized in Florida can include generation-skipping trusts, irrevocable life insurance trusts, qualified personal residence trusts, and many others.

Contact an Experienced Florida Trusts and Estates Attorney

Estate planning is complex and requires careful preparation. It’s important to have a knowledgeable attorney by your side who can help you create a thorough estate plan that satisfies your objectives and meets your needs. At Waugh Grant PLLC, we provide high-quality legal services for a broad scope of estate planning matters in Florida. We welcome you to contact us at info@waughgrant.com or call (321) 800-6008 to learn how we can assist you with your estate planning matters.