For larger marital estates that exceed the exempt amount provided by law, an estate planner typically drafts a Credit Shelter Trust. Credit Shelter Trusts are particularly useful in that they provide:

1. Estate tax free appreciation of the assets allocated to the Trust;
2. Asset protection against estate taxes; and
3. Asset protection against creditors of assets held in the Trust.

The operation of a Credit Shelter Trust is straightforward; upon the death of the first spouse, the Credit Shelter Trust splits^[1] into sub-trusts “A” & “B.” This is achieved by both spouses including the appropriate A/B trust language in the applicable Revocable Living Trust.

Trust “A” becomes the Marital Deduction Trust for the benefit of the surviving spouse, while Trust “B” holds the assets of the decedent. Trust “A” remains a revocable trust controlled by the surviving spouse, and Trust “B” becomes an irrevocable trust controlled by a trustee, usually earmarked for the benefit of the surviving spouse during their lifetime, with the residuary interest going to the beneficiaries/heirs upon the death of the surviving spouse. The surviving spouse selects which assets remain in Trust “A,” with the objective to have Trust “B” allotted the maximum exempt amount allowed by the American Taxpayer Relief Act of 2012, taking into consideration appreciation value of the assets held in the trust until the passing of the surviving spouse. To keep Trust “B” below the threshold of the maximum exempt amount, the trust pays the surviving spouse all income, capital gains, and interest from the property held in Trust “B.”^[2] In essence, both Trust “A” and Trust “B” are the quotient of the same Credit Shelter Trust, operate as sub-trusts for tax purposes, and were derived from the same assets of the Credit Shelter Trust.

^[1]Upon the splitting of the Credit Shelter Trust, the surviving spouse is entitled to a 50% community property allowance.

^[2]Trust “B” may allow a surviving spouse an option to withdraw 5% of the aggregate market value of all property included in the trust not to exceed $5,000 from the principal of the trust each calendar year.