How a Washington Credit Shelter Trust Can Affect Your Future Estate Tax Liability

If you are married and own substantial real estate or property in Washington State, you may need to think about creating a credit shelter trust as part of your estate plan. A credit shelter trust is a type of irrevocable bypass trust that can be used to reduce the amount of federal or Washington estate tax your estate will owe after you die. Basically, if you are married and leave all of your assets to your spouse, those assets become part of your spouse’s estate, thereby increasing the amount of assets that may be subject to estate tax. If, instead of leaving your assets to your spouse, you leave your assets in a credit shelter trust for your spouse, those assets are not part of your spouse’s estate for tax calculation. This glosses over hundreds of pages of complicated tax laws, but essentially you are sheltering your estate tax “credit” from taxation in your spouse’s estate.

Washington Appeals Court Rejects Daughter’s Challenge to Father’s Trust Gift

Credit shelter trusts can be complicated to implement. Even a well-drafted trust can lead to litigation among family members who believe the terms of the trust are not being fairly executed. A recent decision from the Washington Court of Appeals, In the Matter of The H. and C.S. Living Trust, provides a case in point.

This case involved a now-deceased married couple. During their lifetimes, the husband and wife established a living trust to hold their substantial real estate assets. As the living trust was revocable, both spouses retained the right to revoke or amend the trust during their joint lifetimes.

The wife died in 2019. At that time, the living trust held real estate worth about $5 million, which exceeded Washington’s estate tax exemption of $2,193,000. The couple’s accountant advised the husband, as the surviving spouse, to transfer assets to the credit shelter trust with his wife’s share of the trust, which was provided for under the original trust agreement. Essentially, the transferred assets would pass to an irrevocable trust the husband could continue using during his lifetime, but he would no longer technically own the assets.

The husband and wife had two children, a son and a daughter. In addition to funding the credit shelter trust, the husband also executed a separate gift of one of the properties in the living trust as a gift solely to the son. This gift would serve as a way of reducing possible future estate tax liability by removing that property from the husband’s estate. After the husband died, the daughter challenged the gift, alleging it had been part of the assets her father had transferred into the credit shelter trust.

Although the probate court agreed with the daughter and invalidated the gift. The Court of Appeals reversed, however, holding that the father had the right to keep the property in question within the husband’s share of the revocable trust, rather than transferring it to the credit shelter trust. Unlike the credit shelter trust, the marital trust remained revocable during the father’s lifetime, which meant he was free to gift the property as he saw fit.

Contact a Spokane Estate Tax Lawyer Today

If you are looking to minimize your own future estate tax liability so that you can pass more of your property onto your spouse, children, or other loved ones, it is important to start planning now. Our qualified Spokane Valley estate tax lawyers will be happy to sit down and review your options with you. Contact Moulton Law Offices, P.S., today to schedule a free consultation. We serve clients throughout Spokane Valley, Kennewick, and Yakima.

Source:

scholar.google.com/scholar_case?case=7817940875324147345