One common trust which is used in estate planning is known as the Credit
By-Pass Trust, Credit Shelter Trust, or AB Trust. In Florida, this tool
is commonly used in an attempt to reduce the size of a couple's taxable
estate. Today, it is often utilized by couples who have estates which
are close to or over the current individual federal income tax exclusion
limit of $5.34 million for those who die in 2014. If properly drafted,
the trust is funded with the maximum amount of the current federal exemption
for the spouse who dies first (the A Trust). The remainder is placed in
a separate trust for the surviving spouse (the B Trust).
The spouse who passes away first claims the amount up to the federal exclusion
amount in their trust on their estate tax return. No tax will be due under
these circumstances. The terms of the A trust will provide income to an
individual's spouse for life, which can add additional support, including
the ability to utilize the principal of the A trust under certain circumstances.
The remainder would pass to heirs tax free. Upon the death of the remaining
spouse, he/she would have to claim the amount in their trust but would
not have to claim the amount in Trust A since that money is not considered
to be under their control for estate planning purposes. Again, it is important
to reiterate that proper drafting and implementation is key to gaining
this exclusion for estate planning purposes.
If correctly managed and invested, the amount of money in the credit shelter
trust A should grow and provide sufficient income to an individual's
spouse for life. Any growth in the principal amount placed in this trust
is also tax free so if an individual's heirs inherit more than the
federal exemption when the trust proceeds pass to them. Proper drafting,
implementation, and management is key to this type of estate planning
tool. Schedule a consult to learn more about this estate planning technique.