Credit shelter trusts are a way for assets to transfer to heirs without paying an exorbitant estate tax. Sometimes, credit shelter trusts altogether avoid tax payments. These types of trusts are also known as Bypass Trusts or AB Trusts.
If you are curious about credit shelter trusts, continue reading this article for a brief overview of how they function. Bypass trusts are a great way to make sure your heirs receive assets without having to pay taxes.
How the trust works
Upon the individual’s death who sets up the credit shelter trust, all assets pass to a trustee. The surviving spouse lives off the income generated by the estate without taking control of any investments. The surviving spouse does not pay any taxes on the estate because they are not the legal owners.
When the surviving spouse passes away, the remaining estate and assets pass to the heirs. They pay a reduced estate tax due to the nature of its transfer. According to The Hartford, credit shelter trusts are beneficial for passing business assets. This ensures parts of your company do not sell to pay taxes.
The benefits of credit shelter trusts
Credit shelter trusts help protect assets. In the event of your death, creditors might claim your assets. A Bypass Trust keeps the assets in possession of a trustee, preventing excessive depletion of your assets after you die.
A credit shelter trust might be a good option if you have a large estate and want protection from taxes and misallocation. Yet, it is a supremely specified trust that is not always advisable. Do your research before committing your estate to guardianship of this nature.