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The Benefits of a Credit Shelter Trust

By Joel Krooks, Esq., Littman Krooks LLP

In 2021, the New York estate tax exemption amount is $5,930,000. If an individual has over $5,930,000 of assets, then that individual will owe an estate tax at their passing. One planning technique for individuals to consider is to use a Credit Shelter Trust in estate planning documents. This planning tool is only for married couples. The main benefit of a Credit Shelter Trust is to eliminate or lower the New York State estate tax. Currently, the top New York estate tax rate 16%. New York has what people refer to as a “Cliff Tax.” A cliff tax means that if an estate is $1 over 5% of the estate tax exemption ($6,226,500 in 2021) then that individual is taxed on their entire estate and not just the amount that is over the estate tax exemption amount. If the estate is less than 5% over the estate tax exemption then only the excess amount is taxed.

How a Credit Shelter Trust works

Senior couple preparing lunch together in kitchen.Upon the death of the first spouse, the estate plan will direct that an amount equal to the New York estate tax exemption (currently, $5,930,000) will pass to the Credit Shelter Trust. The remaining money would pass outright or to a different trust. The money in the Credit Shelter Trust can be used for the benefit of the surviving spouse and/or descendants. The surviving spouse will still have access to this money, but it will be protected from the surviving spouse’s estate when he/she eventually passes away. It is recommended to not use the money in the credit shelter trust, unless needed.

Example

Husband is first to die and has $7,000,000 in his estate. The Husband’s estate planning documents correctly utilize a Credit Shelter Trust. Therefore, $5,930,000 is distributed to the credit shelter trust and $1,070,000 is distributed outright to the surviving spouse. In this example, the Husband avoids paying estate taxes and the surviving spouse is unlikely to pay an estate tax when she passes because the Credit Shelter Trust is not part of the surviving spouse’s estate. In addition, the surviving spouse is able to benefit from the $5,930,000 million held in the Trust.

If a credit shelter trust was not used, then the husband’s estate would pay a New York Estate tax on the $7,000,000 and the surviving spouse may also owe an estate tax at her passing if she is over the exemption amount.

We at Littman Krooks are here to help you with your estate planning documents. Please contact us to set up a consult in order to make sure your documents are protecting your estate from paying estate taxes.


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