What Is a Credit Shelter Trust?
The federal government imposes a massive Estate Tax (often nicknamed the "death tax") on incredibly wealthy individuals when they pass away. However, every person has a lifetime estate tax exemption. If your estate is worth less than the exemption amount when you die, your family pays zero federal estate tax.
A Credit Shelter Trust (CST) is a strategic legal vehicle used by wealthy married couples to ensure they utilize both of their individual tax exemptions, rather than wasting one of them.
How the Trust Works
Normally, when a husband dies, he leaves everything to his wife. Because transfers between spouses are tax-free, she pays no taxes. But when the wife eventually dies and leaves the combined massive estate to their children, the children can only use the wife's single tax exemption. The husband's exemption was wasted, and the children might owe millions to the IRS.
With a Credit Shelter Trust, the plan changes:
- When the first spouse dies, their share of the wealth (up to the federal exemption limit) is not given directly to the surviving spouse. Instead, it is poured into the Credit Shelter Trust.
- The surviving spouse does not "own" the money in the trust, but they are allowed to receive income from it and use it to maintain their lifestyle for the rest of their life.
- When the surviving spouse eventually dies, the money inside the trust passes directly to the children completely tax-free, because it was already sheltered using the first spouse's exemption.
Relevance in Florida Real Estate
Florida is a premier destination for wealthy retirees, and real estate is often their largest asset. To properly fund a Credit Shelter Trust, attorneys will re-title expensive Florida vacation homes and commercial real estate portfolios so they are owned by the trust rather than the individual, shielding the massive appreciation of the property from future IRS taxation.
Related Terms
- Estate Tax — The massive federal tax the trust is designed to avoid
- Living Trust — Often used in conjunction with a credit shelter mechanism
- Beneficiary — The children who ultimately receive the sheltered assets
Barnes Walker Estate Planning
Barnes Walker's elite estate planning attorneys design sophisticated Credit Shelter Trusts for high-net-worth Florida families, meticulously re-titling massive real estate portfolios to maximize federal tax exemptions and preserve multi-generational wealth. Request a legal inquiry for assistance.
Florida Law Reference
Fla. Stat. Ch. 736 (Florida Trust Code)
The Florida Trust Code governs the creation, modification, and administration of trusts, including trustee duties, beneficiary rights, and trust termination.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC