Benefits of a Credit Shelter Trust

Estate Tax Planning: Benefits of a Credit Shelter Trust

Estate taxes as high as 40 percent may shock surviving family members if their deceased loved one neglected to devise and implement an appropriate estate plan. The federal estate tax exemption is set at $12.06 million in 2022, which, for couples may be double that sum–$24.12 million.

Those whose estates are valued lower may think they need not be concerned. Yet, note that the federal exemption is scheduled to drop significantly when the tax legislation that gave rise to the larger exemption amounts, as noted, ‘sunsets’ at the end of  2025 . In addition, note that while the federal estate tax exemption is relatively high, New York’s estate tax exemption is only $6.11 million.

Married couples who are financially successful could find themselves unprepared for reduced federal estate tax exemption levels, and much lower state estate tax exemption thresholds, unless they take responsible steps to shelter their assets from taxes that reduce their family’s inheritance.

In this blog post, we will explain how an estate planning tool called a Credit Shelter Trust (CST) can benefit married couples by preventing New York estate taxes from diminishing the assets you leave to your family’s younger generation. Here at Ely J. Rosenzveig & Associates, we have extensive experience protecting family assets from otherwise oppressive New York and federal estate taxes.

What is a Credit Shelter Trust (CST)?

A Credit Shelter Trust (CST) is an instrument used to ensure that your surviving spouse and others whom you want to provide for after your death are not saddled with estate taxes. Sometimes called an AB Trust, the CST is designed to take full advantage of any estate tax exemptions while simultaneously reducing or eliminating estate taxes payable when the surviving spouse dies.

Estate tax is payable on any estate assets that exceed the value of the current estate tax exemption. The federal estate tax rate of up to 40 percent applies to any estate assets exceeding the 2022 exemption amount of $12.06 million. The New York estate tax of up to 16 percent could be imposed on the entire estate’s value if it exceeds the $6.11 million exemption by only five percent. (See discussion of  New York’s Estate Tax Cliff provisions, below.)

The Credit Shelter Trust is used in conjunction with the “spousal exemption” feature of both federal and NY estate law. Under both sets of laws, a surviving spouse is always exempt from estate tax on assets they receive from their deceased spouse’s estate. But those taxes are really just delayed until the surviving spouse dies. The estate of the last to die spouse will pay taxes on any assets not otherwise protected.

How a Credit Shelter Trust Works

Here’s how the CST works. Your estate planning lawyer incorporates a Credit Shelter Trust into the estate plans of both spouses directing that assets in an amount equal to the then current estate tax exemption be transferred into a Credit Shelter Trust upon the death of the first spouse.

Benefits of a Credit Shelter Trust
The Credit Shelter Trust is used in conjunction with the “spousal exemption” feature of both federal and NY estate law. Under both sets of laws, a surviving spouse is always exempt from estate tax on assets they receive from their deceased spouse’s estate.

Upon the death of the first spouse, the assets will be counted as part of the deceased spouse’s estate, but no estate tax is owed on the funds transferred to the CST because it equals the amount exempted by law. Since the assets are not being received directly by the surviving spouse, the spousal exemption does not apply to them. That’s why only assets matching the value of the exemption transfer to the CST. The rest of the assets will go to the surviving spouse who pays no estate tax.

For example, assume spouse A and spouse B each owns $8 million of individual assets. When spouse A dies without a CST, they leave their $8 million to spouse B who will then have $16 million dollars. Because of the spousal exemption, spouse B pays no estate taxes. However, if spouse B has no proper estate plan, and they don’t use up enough of the assets, their estate’s value will exceed the tax exemption levels at the time of their death.

  1. Taxes with no CST or no other appropriate estate plan: If spouse B used up $3.54 million, leaving $12.46 million in their estate, their estate’s federal tax bill would be roughly $121,800 (taxable amount = $400,000. Tax = $70,800 + 34% of amount between $250,001 and $400,000 ($149,999 x .34 = $51,000 [approx.]). This, of course, does not account for relevant deductions/offsets, like the deduction for NYS estate taxes paid.

    The New York estate tax would be roughly $ 1,460,400 ($1,082, 800  + 16% of amount exceeding $10.1 million (.16 x $234,999 = $377,600 [approx.]). Estate taxes, federal and state, could total $1, 582,200, not counting any offsets, credits and applicable deductions.
  2. Taxes with a CST and no other appropriate estate plan: If spouse A had $6.11 million transferred to a CST for the use of their heirs or surviving spouse, no estate tax is due because its value does not exceed either the federal or the New York estate tax exemption level. Their remaining $1.89 million would be transferred to the surviving spouse with no tax because of the spousal exemption. Spouse B would have $8 million plus $1.89 million totaling $9.89 million.  If spouse B used up $3.54 million, as they did in the first scenario, they would leave $6.35 million in their own estate at their death. This is well beneath the current federal estate tax exemption. The estate’s value exceeds the New York exemption by $240,000, within the 5% cliff rule.  Without proper estate planning (e.g., Santa Claus conditional charitable gifting in the Will), the $240,000 excess would cause the estate to owe New York $ 7,344 (3.06 % of a taxable estate of $240,000). Including a CST in their estate plans results in an enormous savings in this example.

With no CST, the estate taxes (federal and NYS) owed are roughly $1,459,600.

Using the CST, the estate taxes owed are roughly $7,344 (Savings of $1,452,256).

Other Important Credit Shelter Trust Benefits

Planning to prevent unnecessary estate taxes is a high priority at Ely J. Rosenzveig & Associates. We use our decades of experience in elder and testamentary law to ensure that the assets you and your spouse earned over a lifetime are preserved through efficient use of appropriate legal instruments.

No “Porting” Between Spouses in New York

Another key difference between federal and New York estate tax law is the concept of portability, or “porting.” Under federal law, if the first spouse in a married couple dies with an estate valued at less than the available estate tax exemption, the balance of the deceased spouse’s unused exemption can be applied to the estate of the second spouse at the time of their death. That borrowing of the first spouse’s residual exemption increases the amount of assets exempted from estate tax in the second spouse’s estate.

New York State does not provide for any portability of the earlier deceased spouse’s exemption. By using a Credit Shelter Trust, the couple gets to enjoy the full value of any exemption available when the first spouse dies.

New York’s Estate Tax Cliff

Most states that impose and estate tax assess the tax only on the estate assets that exceed the value of the exemption. If an estate were valued at $8 million dollars in a state with a $7 million estate tax exemption, then only the $1 million over the exemption level would be taxed. Not so in New York.

In New York, the estate tax exemption for 2022 is $6.11 million. If any estate’s value exceeds that amount by more than 5%, then the entire value of the estate is subject to estate tax. Again, using a Credit Shelter Trust can substantially reduce the value of the surviving spouse’s estate and decrease or even eliminate any New York estate tax.

We Recommend Comprehensive Estate Planning

 Credit Shelter Trusts are only on of the tools the trusts and estate plan lawyers at Ely J. Rosenzveig & Associates use in our asset protection and preservation experience. Other trusts and legal instruments may be more appropriate for your individual circumstances. For reliable, informed, and experienced advice about your estate planning needs, contact Ely J. Rosenzveig & Associates.

Contact Ely J. Rosenzveig & Associates for Experienced Surrogate Court Counsel
Call 1.914.816.2900 or email us at: [email protected]

Ely J Rosenzveig
Ely Rosenzveig

Ely J. Rosenzveig practices principally in the fields of elder law, trusts & estates, tax planning, employment law, and mediation. He has extensive experience in federal and New York State tax law, and has successfully represented a wide range of clients on FBAR & FATCA compliance issues. Ely also practices employment law, with a particular emphasis on age and disability discrimination, negotiating compensation agreements, and severance issues.

With his extensive background in the law, his experience as a congregational rabbi, and his specialized training in Mediation at Harvard Law School, Ely is also available as a professional mediator to help facilitate optimal solutions in matters ranging from family and estate disputes to multi-party commercial issues.

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