 Personal Finance PowerPoint Presentation Credit Shelter Trust CST Prepare to get financially fit by practicing personal finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page we also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it Most of this information comes from Investopedia Credit Shelter Trust CST which you can find online take a look at the references resources continue your research from there this by James Chen updated July 16th, 2022 in prior presentations we've been looking at estate planning then focusing in on particular tools used in estate planning which may or may not be applicable depending on your circumstances and situations this time that being the Credit Shelter Trust First question What is a Credit Shelter Trust CST? A Credit Shelter Trust CST is designed to allow affluent couples to reduce or completely avoid estate taxes when passing assets to heirs typically the couple's children so we went over kind of like a timeline of the process for the estate planning in prior presentations quick recap before the time of death our goals are typically to be able to allocate our assets at the point of death and to be able to make that process as easy as possible on our loved ones our heirs at that point and if we have a significant amount of assets we might be subject to estate taxes we would like to lower the use or the amount of taxes that are being paid because theoretically of course we'd want to be giving more of our money to the people that we want to give the money to keeping that in mind we're now looking at a Credit Shelter Trust designed to allow affluent couples people that are well off the reason it's more affluent couples is because the estate tax which you might think of as like a death tax which is a tax in essence on the balance sheet as opposed to what we're typically thinking of with taxes which is an income tax so you got the balance sheet or the assets at the point of death accumulating if they're significant enough you could be subject to the estate taxes and so more wealthy individuals are going to have more concerns about that to reduce or completely avoid the estate taxes basically the death tax that would be on the assets of the estate at death when passed to the heirs so this type of irrevocable trust is structured so that upon death of the trustor's creator or settler the assets specified in the trust agreement and the income they generate are transferred to the settler's spouse so remember normally when you think about passing on your assets at the point of death the first tool we think of is a will but if you have a will then you could still be subject to basically the probate process which can be kind of a costly process and you might have other strategies with regards to of course estate planning as well so you might use tools such as trusts trusts being similar to like a corporation or like a separate legal entity in a way they're an entity in and of themselves which have characteristics that we typically apply to human beings such as the capacity to own property and so that could have some useful applications with regards to a state planning one of them being setting up a trust to try to make the probate process a little bit easier and then when we get into more complex estate planning to try to reduce the state taxes we might try to put our money into a trust to reduce the taxes now remember that this whole thing with the estate taxes the back and forth would be the IRS wants to tax a wealthy individual when as they die on basically their balance sheet the wealthy individual then has an incentive to give all their money away on their deathbed the government doesn't like that so they're going to try to say that we've got to gift, gift rules are going to be the state taxes so that we're going to limit your capacity to just give your money away right before you die so then of course you have complex strategies to try to give your money away one of them would be well what if I gave my money away to a separate legal entity a trust well you might be able to do some planning like that but if you still have control over the trust meaning it's revocable you can change it at any time then you haven't really given your money away would be the argument from the IRS and that's why we have this concept of irrevocable trust if it's in an irrevocable trust and you no longer have control over what to do with the money although you've kind of set forth what you would like to do from with the money then that's when you're walking the line between the estate planning whether you gave the money away which can be beneficial for estate taxes okay keeping that in mind understanding a credit shelter trust CSTs are created upon a married individual's death and funded with that person's entire estate or a portion of it as an outlined in the trust agreement so these assets then flow to the surviving spouse so remember when you're talking about a couple then you have a bit more complexities in terms of these asset allocations right because if you're one individual then you own what you own and at the point of death you know you're going to do what you're going to do with it when you're married couple and then the question is well are you like one entity now which is kind of the original thought of marriage right now you're one like entity with regards to what your ownership and so on and so forth but that concept can be a little bit different from state to state if you were one entity you would think that one person dies and they give the then the other person still alive so they would kind of have control over the assets of that financial entity and then when they die they pass the assets along so and so forth in accordance with whatever they have set up but you have different laws with regards to different states that you want to be aware of and also when you're talking about the taxes for the death taxes the estate taxes there's usually like an exemption amount which you can think of as kind of similar as an income tax standard deduction that you get on an individual basis so if you think about the income tax standard deduction usually you have like the standard deduction for single and married is like twice as much but for estate taxes they don't have that it's just one exemption per person so now the question is well if I'm married I want to make sure I get the exemption amount for both individuals which can be a little bit complex because when the second individual dies they're going to have all the assets of the two individuals in their estate unless you do something it's kind of tricky with trusts right so that's one reason you might be putting in the trust which would be necessary to think about if you have a married couple with a significant amount of assets so however because the trust is managed by a designated trustee their surviving spouse never actually takes control of the assets so the idea is that the one person dies they put the money into a trust so the other spouse never really gets control over it so when they die they don't have twice as much assets you're going to try to get the exemption or maximize the exemption on a per person basis that way therefore the transfer does not add to the surviving spouse's taxable estate so that means when the next spouse dies hopefully they're only taxed on half of the estate or you're going to try to minimize the taxes in any case so a key benefit to this type of trust is that the surviving spouse maintains certain rights to the trust assets during the remainder of their life so now the surviving spouse what you would like to have happen is the surviving spouse still has as much control as possible over the assets but they're not going to be subject to the surviving spouse's estate is the general concept under specific circumstances such as the need to fund certain medical and educational expenses their surviving spouse can tap into the trust principal and not just income so typically the trust would be set up so that the income would be the thing that the terms of the trust that would then have access to possibly not the principal depending on the terms of the trust but under certain circumstances they might still have the capacity to tap into the principal so upon surviving spouse's death the trust's assets are transferred to the remaining beneficiaries without any estate taxes levied that's the general idea what you want to have happen instead of them being combined in with the surviving spouse making them have a large lump sum which could make more of its subject to estate taxes so CST's Credit Shelter Trust are known as AB Trust or Bypass Trust so we've talked about them in terms of a different name in prior presentations so just to clarify you might hear them name different things you've got the Credit Shelter Trust also known as AB Trust or Bypass Trust this is because CST's are essentially Bypass Trusts in which each spouse has a separate quote taxable end quote of state these estates are known as A Trust and B Trusts so the point is that you're trying to maximize when one spouse dies the exemption and so that you get kind of like again compared to the income tax the standard deduction that would be applied to the two individuals rather than just one that would be applied to the second individual when they die Credit Shelter Trusts and Tax Protection CST's are designed so that couples can take full advantage of estate tax exemptions now remember we can think of those exemptions as kind of similar as the standard deductions for the federal income taxes our goal being to maximize the exemption amount of benefit we can get for the two individuals involved in a marriage in 2021 the generation skipping transfer tax GSTT Exemption was $11.7 million for individuals and $23.4 million for couples now remember that when we're thinking about the estate tax we know that if the government tries to apply an estate tax on a wealthy individual the knee-jerk reaction will be for that individual to try to give all their money away right before they die so they don't have anything for the estate taxes on death that means the government's going to be trying to put rules in place tying together the concept of gifts and with the basically the estate taxes also note that these numbers the 11.7 and the 23.4 million can look quite large when you're talking about the average individual so you might say well the average person may not be subject to the estate taxes but a couple things to keep in mind note that the estate taxes and even the income tax when it was first put in place especially the estate tax when it was put in place was thought that it was only going to be applicable to very wealthy individuals which you would think these days would be like billionaires and the 11.7 for example is far from a billionaire or a billion and two we also note that these numbers can change dramatically so when you're doing the estate planning depending on whatever the politics are at the particular time they can change these numbers drastically and to consideration when you're doing your estate planning so it was 11.58 million individual in 2020 and 23.16 million couples so this lasts until December 31st 2025 if Congress doesn't drastically update the tax cuts and jobs act before then so note again they try to put some consistency in it when they put these laws in place they have it going for some point in time but there's been a lot of big swings with regards to some of these limits and we just don't know what's going to happen because politics will depend upon it or it will depend on politics so benefits of credit shelter trusts the credit shelter trust has advantages beyond estate tax planning a CST protects assets of surviving spouse and provides flexibility in distribution asset protection the CST protects the assets of a surviving spouse for example a surviving spouse's assets are susceptible to creditors and possible depletion by children or a new significant other the CST protects the assets from creditors and from being inappropriately used by the surviving spouse for example to pay the debts of a new spouse or their children because now you've got the money that went from the one spouse that died into the trust which has some restrictions on it whereas if it went just to the other spouse then the other spouse has possibly more control to do whatever they want and possibly could be subject to manipulation possibly from another individual or whatever so protecting the testamentary intent of the deceased spouse in a blended family each spouse may want to ensure that their share of the estate is passed to their chosen beneficiaries children from a prior marriage for example and not just to the surviving spouse's beneficiaries so we could have more complex family structures that we want to consider and that could be the trust could be useful to try to care for those kind of needs the CST can help with this flexibility and the trust distribution provisions the trust language can incorporate a limited power of appointment for the surviving spouse thus surviving spouse may distribute the assets among a class of beneficiaries e.g. the issue of the deceased spouse so an example is a child who did not need a special needs trust at the time the trust was drafted but after the decedent spouse's death a special needs trust was preferred in this case the surviving spouse would be able to take the assets to a new special needs trust to provide for that child maximize the deceased spouse's generation skipping tax GST exemption so how can you get the most out of this process the GST exemption is not portable the bypass trust allocate the GST to a GST exempt bypass trust preserving the GST exemption for lifetime children's trusts so protecting growth assets from further estate tax on the surviving spouse's death so in other words when the one spouse dies if the money is going into the trust you've got the exemption at the point in time the money went into the trust but from that point in time until the second spouse dies you would expect them that that money would be growing within the trust and hopefully the growth in that money in the trust is also not subject to the taxation or the estate tax when the second spouse dies because it was in the trust at the point in time of the first spouse so if you have substantial growth after the death of the first spouse because you're investing in assets that are now in the trust that grows substantially then hopefully you can gain a substantial amount of growth which hopefully may not be subject to the estate taxes when the second spouse dies because that was the money that was in the trust not subject to the estate tax at the point of death so we have a 5 million property or stock portfolio can be allocated to the CST on the decedent spouse's death so the portfolio can be used by the surviving spouse and can grow to 8 million then pass free of the estate tax to the bypass trust beneficiaries property tax benefits a distribution to a child from a CST considered a transfer from the decedent spouse and not the surviving spouse the distribution can take advantage of the decedent spouse's 1 million dollar non-resident parent child property tax reassessment exclusion an additional 1 million dollars in reassessment exclusion can benefit spouses who own valuable rental or vacation properties let's take a look at an example of a credit shelter trust suppose a husband and wife who have been married for several years each accumulate an estimate worth of 6 million dollars and the husband sets up a credit shelter trust to be funded upon his death with his share of their combined estate so before death they set up their planning process which includes the credit shelter trust after the husband dies his 6 million dollar estate and any income it generated will be taxed to his wife because it falls below the federal exemption however the transfer boosts the wife's net income to 12 million dollars and pass the estate tax exemption so you can see where the problem is here because if the exemption is at the 12 million then what you want to be able to do is maximize the two people's exemption if it just passes to the wife now she is over the 12 million whereas if you can divide it out it would be under the threshold meaning if you could take advantage of the two exemptions so because these assets were held in the trust outside of the wife's control her taxable estate is still valued at 6 million and still within the state tax exemption so you see what's happening here if you combine them together then at the point in time that the second spouse dies then they're going to be over because you have both of the income together so what you want to be able to do is when the first person dies try to maximize the amount of the exemption that would be applied to them and then possibly the second one dies and only half of it would be subject to the exemption because the other would be in the trust which isn't technically part of the second spouse's estate at that point because it's in that separate legal entity would be the idea thus she can pass on her assets to the state tax when she dies how do I terminate a credit shelter trust there are circumstances where if one spouse is deceased but the surviving spouse is still alive the CST can be modified or terminated either by the trustee alone by the trustee and all the beneficiaries or by going to court consent of the beneficiaries is typically required what happens when a credit shelter trust is depleted in some cases the value of a first decedent gross estate may be reduced by deductions for debts funeral expenses and expenses of administering the estate and it may not be large enough to use the estate tax exemption in full in that event the unused exemption can be preserved for the surviving spouse if the first decedent's executor make a portability election on a timely file form 706 united states estate and generation skipping transfer tax return