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John J. Ross, Attorney at Law 46 Thoreau Dr., Freehold, N.J. 732-294-9036

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ESTATE PLANNING
ESTATE TAXATION
CREDIT SHELTER TRUSTS
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CREDIT SHELTER TRUSTS


     While there seems to be a reasonable level of awareness among elder law clients of federal estate taxes and the current $5,450,000 exemption from such taxes available to individuals, there is a much lower level of knowledge of the estate tax that New Jersey can impose and the significantly lower $675,000 exemption that New Jersey provides. What makes the relative lack of knowledge both alarming and understandable is the fact that many clients whose net worths are in excess of $675,000 and who have recently had their finances reviewed by accountants and/or financial planners, frequently report that they have only been told about the Federal Estate Tax and the $5,450,000 tax threshold. Given the fact that the assets that comprise an estate subject to the New Jersey Estate tax and the Federal Estate Tax include a person’s home, savings and investments and death benefits from life insurance proceeds, it is easy to see how a substantial number of seniors who consult an attorney for elder law advice, have estates in excess of the $675,000 exemption amount and can benefit from the use of trusts.

     One of the most common trusts that an elder law practitioner will use, in light of the number of clients exposed to the New Jersey Estate Tax, is a Credit Shelter Trust. This type of trust is also commonly referred to as a By-Pass Trust. The rationale behind the use of a credit shelter trust starts with recognition that (a) estate taxes are not imposed when assets of any amount pass to a surviving spouse, and (b) the $675,000 exemption amount is an amount that is available to each spouse can be utilized to protect the inheritance of the next generation of beneficiaries. If one spouse dies and leaves all assets to the surviving spouse, no estate tax will be imposed, but the deceased spouse’s $675,000 exemption amount will die with the deceased spouse. If, on the other hand, the deceased spouse’s will includes a credit shelter trust and provides a mechanism for directing part of the surviving spouse’s inheritance into the credit shelter trust, all or part of the deceased spouse’s $675,000 exemption can be preserved. For example, if a husband and wife own assets valued a $1,300,000, and $625,000 of the assets are directed into a credit shelter trusts upon the death of the husband, estate taxes will be avoided altogether if the value of the assets that are owned by the wife is no more than $675,000 upon her subsequent death. This is because the $675,000 passing upon the wife’s death will be protected by her $675,000 exemption, and the amount passing from the credit shelter trust also upon the wife’s death will be protected by the husband’s $675,000 exemption.

     The credit shelter trust can be structured to require distributions of income to the surviving spouse during his or her lifetime and can allow for the distribution of principal, subject to the discretion of the trustee who should be someone other than the surviving spouse. The amount allocated to the trust can be determined by a formula set forth in a will or by the surviving spouse by a disclaimer. Given the fluctuations in people’s net worths and the equally unpredictable nature of tax policy, funding a credit shelter trust through a disclaimer is an appealing and commonly utilized approach.