Will Credit Shelter Trust

Credit shelter trusts are trusts for affluent couples to minimize or avoid their estate tax liabilities by passing on proceeds from individual estates onto the partner's estate.

A marital trust starts as a revocable living trust. A surviving spouse can be its trustee.

A credit shelter trust (CST) is a trust created after the death of the first spouse in a married couple. Assets placed in the trust are generally held apart from the estate of the surviving spouse, so they may pass tax-free to the remaining beneficiaries at the death of the surviving spouse.

In the case of a marital trust, the IRS subjects the remaining trust assets to federal estate taxes when the surviving spouse passes. However, a couple can take advantage of the federal gift and estate tax exemption. This is the amount that you can pass on to heirs before you'd ever owe an actual estate tax.

I live in California, a community property state.Federal tax code section 1014(b)(6) provides that community property assets step up 100 percent in basis at the death of one spouse (even though the other spouse survives).

Assets that have been conveyed into a revocable living trust do get a step-up in basis when they are distributed to the beneficiaries after the passing of the grantor. We should point out the fact that the beneficiaries would be responsible for any future appreciation from a capital gains perspective.

First, in a standard credit shelter trust, there is no step-up in basis at the death of the surviving spouse.Second, the credit shelter trust is a separate taxpayer and requires its own tax return, Form 1041.

Yes, the surviving spouse may serve as trustee of the credit shelter trust.All of the assets in the credit shelter trust, including any appreciation in value during the surviving spouse's lifetime, pass free of estate tax to the beneficiaries.

Assets That May Not Be Eligible for a Step-Up in Basis 401(k) accounts. Pensions. Tax deferred annuities. Certificates of deposit.