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11. Credit Shelter Trusts

One of the main purposes of a credit shelter trust is to limit estate taxes when the surviving spouse dies. Tax law changes have made the federal estate tax inapplicable to nearly all Americans. A certain amount of each person’s estate is exempted from taxation by the federal government. The estate tax exemption is $5,000,000 per person. This means that if the total value of your property is less than $5,000,000, you will not owe federal estate taxes. In addition, if one spouse does not preserve his or her estate tax exemption amount by creating a credit shelter trust, the surviving spouse can add the deceased spouse’s exemption amount to his or her own. This means that $10 million dollars (the total value of both exemptions) is protected from federal estate taxation without complex estate planning.

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Who Benefits from a Credit Shelter Trust?

The beneficiaries of a credit shelter trust are the deceased spouse’s other beneficiaries -- usually the children. These trust beneficiaries cannot be changed after his or her death. This ensures that the property in the deceased spouse’s credit shelter trust will be distributed to his or her beneficiaries after the surviving spouse’s death, estate-tax free. However, the surviving spouse retains a life estate in that property, which means that he or she can use it during his or her lifetime. In addition, the surviving spouse can use all net income generated by the assets, and can even use the principal for heath and maintenance.

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