Credit Shelter Trusts
A CREDIT SHELTER TRUST is a Personal Trust that is defined in Section 2056 of the Internal Revenue Code (“IRC”). It provides for the exclusion of estate death taxes at the time of the first spouse’s death, and is commonly known as the “Bypass Trust” or “Family Trust.” It is often created by an individual’s Will (through “pour over provisions”) or through provisions in an individual’s Living Trust. It is intended to hold assets for the benefit of the heirs of the individual who creates the Trust. However, the most immediate purpose of the Trust is to provide income to the surviving spouse during his/her lifetime.
The purpose of a Credit Shelter Trust is simple – a spouse should be able to pass his/her estate (their property and assets) that he/she has at the time of his/her death to the surviving spouse without the property being subject to “inheritance” taxes. There are several requirements that must be included in the Trust document in order for a Credit Shelter Trust to be valid. At its core, the Credit Shelter Trust shields the property and assets from federal estate taxes at the time of the first spouse’s death and will pass the assets to the named heirs in the Credit Shelter Trust at the time of the surviving spouse’s death. During the surviving spouse’s lifetime, the property or assets in the Trust (the “Trust principal”) are intended to generate income to the surviving spouse and growth for the heirs. The income is distributed to the surviving spouse, and the Trust principal is ultimately distributed to the Trust’s named heirs. However, the spouse has potential access to the Trust principal if the income is insufficient to take care of his/her support, education and health needs.
Assets held inside the Credit Shelter Trust are managed by a Trustee who has the legal responsibility for managing and overseeing Trust assets to provide adequate support of the surviving spouse and to distribute the Trust principal to the named heirs in accordance with the terms and conditions of the document. Credit Shelter Trusts are not public documents; the terms and conditions described in the document remain confidential.