What is a Credit Shelter Trust? Do I need One?

Simply put, a Credit Shelter Trust , also called a bypass trust or exemption trust, is a valuable tool used in estate planning in Washington State.

Its primary function is to help mitigate the federal & state estate taxes that can often significantly burden a deceased person’s estate. In this article, we will dive into the specifics of a Washington Credit Shelter Trust, which can be instrumental in fully leveraging a deceased person’s Washington estate tax exemption amount. This knowledge is critical, as it can substantially impact the inheritance that eventually reaches your heirs.

So, how can we fully answer the question of “what is a credit shelter trust?”

First, it’s necessary to know the state and federal estate tax exemption amounts. As of 2023, Washington has an estate tax exempting $2,193,000 per person . This means that estates valued at less than this amount won’t be subject to state estate tax. On a federal level, the estate tax has a significantly higher exemption amount, standing at $12.92 million per person .

Now, let’s focus on the nuts and bolts of a Washington Credit Shelter Trust and how it can contribute to significant tax savings. In simplistic terms, upon a person’s death, their assets are transferred into the Credit Shelter Trust up to $2,193,000 . This figure represents the current Washington estate tax exemption .

How Does a Credit Shelter Trust Work

The trust is structured so that the surviving spouse can utilize the assets and any income the trust generates for their lifetime. Importantly, even though they can access these benefits, they don’t technically own the assets. This distinction is crucial when determining the size of their taxable estate upon their death.

Credit Shelter Trust Example

Imagine a couple, married for numerous years, with an estate valued at $6 million. The husband establishes a credit shelter trust, planning to fund it with his portion of their collective estate upon his passing. When the husband passes away, his $6 million estate and any revenue it generates are transferred to his wife free of estate tax since it’s under the federal exemption limit.

Nonetheless, this transfer raises the wife’s net worth to $12 million, surpassing the estate tax exemption. However, as these assets were held in the trust and outside the wife’s direct control, her taxable estate remains valued at $6 million, keeping it within the estate tax exemption. Consequently, when she passes away, she can bequeath her assets to her children without incurring any estate tax.

How a Credit Shelter Trust Functions

When the surviving spouse dies, the assets held within the trust are not included in their taxable estate. This means the value of these assets is not subject to Washington estate tax. A married couple can double their Washington estate tax exemptions by implementing a Washington Credit Shelter Trust, potentially resulting in substantial tax savings for their heirs.

In conclusion, a Credit Shelter Trust is a potent estate planning tool that protects your hard-earned assets and passes them on to your loved ones with minimal tax implications. While this discussion focuses on the benefits as per Washington state regulations, the use and impact of a Credit Shelter Trust can vary based on federal laws and laws of other states.

At Moulton Law Offices, our team of experienced estate planning attorneys can provide the guidance you need to create an estate plan that suits your unique circumstances, including creating a Credit Shelter Trust. Navigating the complexities of estate planning can be overwhelming, but with our expertise, we’ll ensure that you and your heirs are set up for the best possible future.

Need to terminate a Credit Shelter Trust or modify your estate plans in general? Please don’t hesitate to contact our office to schedule an initial consultation.