The Credit Shelter Trust in Action

The credit shelter trust is a type of legal entity that many people use in their estate planning. This type of trust is designed to help people pass assets onto beneficiaries without paying excessive estate taxes. Here are the basics of the credit shelter trust and some examples to help you understand what it can do.

The Credit Shelter Trust

A credit shelter trust is a tool that a married individual can utilize to pass assets onto a beneficiary. One of the primary reasons for using this type of trust is so that you can avoid paying capital gains taxes and paying estate taxes. Here are a few examples of how the credit shelter trust works.

Capital Gains Avoidance

One of the biggest benefits that you get by using a credit shelter trust is capital gains tax avoidance. This is accomplished by the fact that you can change the cost basis of financial assets once they go into the trust. For example, let's say that a couple has $5 million worth of stock that they purchased 30 years ago. At that time, they paid only $100,000 for the stock. They decide to put the stock into a credit shelter trust to pass onto their children. Once they put the stock into the trust, the cost basis goes from $100,000 to $5 million. By doing this, they are avoiding paying capital gains taxes on $4,900,000. Then, whenever the assets in the trust get passed onto their beneficiaries, the beneficiaries will not have to pay this large capital gains tax.

Estate Tax Avoidance

With the credit shelter trust, you can also avoid estate taxes. According to estate tax laws, you can pass assets onto your spouse without paying any taxes. However, if you want to pass assets onto your children, an estate tax might apply. For example, if an individual passes on more than $1 million to a beneficiary during 2011, estate taxes will be charged on the $1 million. If you have assets that are more than $1 million, you could potentially be paying a lot of taxes on the money before it gets to your beneficiaries.

With the use of the credit shelter trust, you will not have to worry about any of these taxes. You can put assets into the trust, and when you die, the assets will be transferred to your beneficiaries. The beneficiaries will not have to worry about paying any estate taxes on the assets that they received.


You will be able to choose the trustee on the credit shelter trust in advance. Many people prefer to name a spouse as a co-trustee with someone else, such as a lawyer. This way, if the spouse remarries, you can make sure that funds from the trust do not go towards the new spouse. Credit shelter trust rules would prevent this anyway, but naming a co-trustee will make sure that everything is handled correctly.

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