Why is there a Credit Shelter Trust in my Will and do I still need one?

A credit shelter trust (CST) is a type of trust that is used to protect assets from estate taxes. It is typically used by married couples to ensure that their assets pass to their heirs without being subject to estate taxes. The CST works by transferring assets from the first spouse to the trust, which is then not subject to estate tax.

The estate tax exemption at its lowest point was $40,000 in 1926 but the amount has been steadily rising ever since. It was $2,000,000 in 2007 and currently sits at $12,920,000. This means that a married couple can now pass a combined total of $25,840,000 to their heirs without having to pay estate taxes. If you had your Will drafted at a time when your assets were close to or more than the federal estate tax exemption amount, you may have been advised to include a credit shelter trust as part of your estate plan.

If your combined assets are less than $25,840,000, then you likely no longer need a CST. The assets that you pass to your surviving spouse will not be subject to estate taxes, regardless of whether they are passed outright or through a trust. Please note: this exemption is set to sunset on December 31, 2025, and revert to the pre-2018 level of $5 million, adjusted for inflation, in 2026. This means that the estate tax exemption in 2026 is estimated to be around $6.5 million per individual, or $13,000,000 combined per couple.

Another reason you may no longer need a CST in your Will or Trust is if you are unmarried or your spouse has already died, and you have no children.

Having a CST in your Will when you do not need one can cause problems for your estate and/or your beneficiaries.

  • The distribution of assets to your beneficiaries may be delayed. The assets in a CST are not distributed to your beneficiaries until the surviving spouse dies. This can delay the beneficiaries from getting access to the assets, which may be important for their financial security.
  • Administration may be more costly. The administration of a CST can be more complex and expensive than the administration of a simple Will. This is because the trustee of the CST has to be responsible for managing the assets in the trust and distributing them to the beneficiaries according to the terms of the trust over the lifetime of the trust.
  • The use of the assets in the CST may be restricted. Assets in a CST may not be available for your spouse to use for specific purposes, such as paying for your children’s education.

Ultimately, the decision of whether or not to have a credit shelter trust is a personal one. You should weigh all of the factors involved and make the decision that is best for you and your family. It is always best to consult with an attorney about whether you still need a CST as part of your estate plan. Feel free to contact the Legacy Studio Estate Law team for a consultation if you need help.