A credit shelter trust (CST) is an estate planning tool used for married couples to help reduce, if not eliminate, estate tax due at the death of the surviving spouse.

Federal Estate Tax

The current federal estate tax exemption is $11.7 million. This means individuals can gift up to the federal exemption amount during their lifetime or after death without incurring a federal– the “death” and “lifetime gift” tax is combined. Married couples can gift up to $23.4 million, by electing “portability” election is on the federal estate tax return after the death of the first spouse (form 706). Estates valued at more than the exemption amount will be taxed on the overage at a 40% tax rate. It is important to note that the federal estate tax exemption is expected to sunset on or before January 1, 2026, plummeting to anywhere between $3.5 million and $6 million dollars.

New York State Estate Tax

In New York, the estate tax exemption is currently $5.93 million but there is no “gift” tax. New York residents can gift up to the federal exemption amount ($11.7 in 2021) during their lifetime, even if said gifts exceed $5.93 million. However, any assets gifted within three years of a New York resident’s date of death will be clawed back and includable in their estate. If a New Yorker dies with more than $5.93 million in their sole name, the estate will incur an estate tax rate between 5% and 16%. Additionally, the entire estate will be taxed –- not just the amount over the limit—referred to as the estate tax cliff.

New York State Does Not Have Portability

New York does not offer portability rights. As such, a surviving spouse cannot use their deceased spouse’s unused exemption towards their own exemption – unless certain estate planning techniques are used. The CST is one such tool.

Married couples have what is called an unlimited marital deduction, where the entire estate of the first spouse to die can pass to the surviving spouse, tax free. The idea being that taxes are owed when the surviving spouse passes away. However, if all assets pass to the surviving spouse, said spouse may end up with a taxable estate at their death. Instead, a CST can be used in conjunction to capture the spouse’s exemption and avoid NYS estate tax.

The Structure of a Credit Shelter Trust

A last will and testament, or a Trust, can direct that a CST be created and funded at the death of the first spouse, with some or all of the deceased spouse’s available exemption. The CST will still benefit the surviving spouse by giving the spouse the right to the trust income and the ability to withdraw trust principal for the spouse’s health, education, maintenance or support. Beyond that, the assets of the trust are considered outside of the surviving spouse’s estate and will pass on to the remaining beneficiaries, tax free, at the surviving spouse’s death.

A CST also has benefits beyond estate tax planning purposes. Let us say, for example, that you and your spouse each have children from previous relationships. A CST can ensure that upon your spouse’s death, any assets remaining in the trust are passed on to your children and not your spouse’s children.

An Estate Planning Attorney Can Help Achieve Your Goals

A Credit Shelter Trust can be drafted in various ways to accomplish your particular goals. It is important to meet with an estate planning attorney to discuss your requirements and ensure your wishes are correctly carried out through your estate planning documents.