Credit Shelter and A-B Trusts
Updated: Mar 19, 2019
Credit Shelter Trusts and A-B Trusts allow a married couple to minimize estate taxes when passing assets on to heirs. The trusts are structured so that upon the death of the first spouse, the assets specified in the trust (up to a maximum dollar value) are transferred to the trust.
A key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his/her lifetime; however, the assets will not be included in the taxable estate at the second death. The surviving spouse can even be the Trustee of the trust.
Many Credit Shelter and A-B Trusts were created to avoid estate tax at a time when the federal estate tax exemption was only $600,000. However, the federal estate tax exemption is $11.4 million in 2019. Many of these trusts that currently exist should now be terminated.
If an estate tax liability is no longer an issue, the fact that the Credit Shelter Trust does not get a stepped-up basis at the death of the second spouse, creates an unnecessary capital gains tax liability. Indiana Code section 30-4-7-6 allows individuals to draft a Family Agreement to terminate a Credit Shelter Trust. Contact our office for more information.