A popular form of trust is credit shelter trust. It is also known as bypass trust. Married couples, whose estate exceed the exempt amount of federal estate tax, use this type of trust to reduce the burden of federal estate tax. At present every individual enjoys an estate tax credit resulting in exemption from estate tax for the first $2 million of his assets passed over to anybody else. In 2009 this exemption is due to rise to $ 3 million.
Under the unlimited marital deduction provision, each spouse can leave an unlimited amount of assets to the other spouse without using up any estate tax credit and free of estate tax. However, when the second spouse dies leaving assets larger than exempted amount of $2 million his or her estate including the assets received from the other spouse will suffer estate tax. Moreover the first spouse’s estate tax credit or exemption limit was unused and lost for ever.
The bypass trust addresses this challenge of wastage of estate tax credit or exemption limit. One spouse could put in the first $ 2 million of his estate, consisting of the exempted amount, into a trust that is a separate entity for the benefit of the other spouse. The trust could provide that all the earnings of the trust could go to the other spouse. Moreover, any part of the trust could be used for the health and support of the other spouse. On the death of the other spouse the remaining trust would go to the children. Such irrevocable trust deed must be carefully worded so that other spouse gets only limited control over the trust assets.
When the first spouse or the grantor of the trust dies, the $ 2 million donated to the trust escapes estate tax as exempted amount under the tax credit. However, the benefit of this form of trust is that the trust properties will not be included in the estate of the other or second spouse on death. It would pass on to the children from the trust as remainder beneficiaries free of estate tax.
The assets in the irrevocable trust go to the children without estate tax on the death of the other spouse. Further any appreciation in the trust assets go to the children without suffering estate tax on such incremental value since estate tax value is locked in at the death of the donor spouse.
(More http://acronyms.thefreedictionary.com/Credit+Shelter+Trust
http://www.businessdictionary.com/definition/ )
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