Bypass Trust or Credit Shelter Trust Defined
A Bypass or Credit Shelter Trust refers to a method of passing assets to beneficiaries without subjecting those assets to estate taxes. The Bypass trust is designed in such a way upon the death of the settlor or creator of the trust, the assets stated in the trust agreement and income generated from those assets are transferred to the spouse of the settler.
Besides, one of the key importance of Bypass trust is that it gives the surviving spouse some rights to the assets under trust during the remainder of her or his lifetime. In case of some circumstances such as payment for education or medication, the surviving spouse is allowed to not only the income but also the trust`s principal. On the other hand, upon the death of the surviving spouse, the assets of the trustees are transferred to the remaining beneficiaries without charging any estate tax.
A Little More on What is a Bypass Trust or Credit Shelter Trust
Credit shelter trusts are developed upon the death of a married individual and financed by the entire estate of the person or a portion of it at agreed upon in the trust agreement. These assets then transferred to the surviving spouse. However, since a chosen trustee controls trust, the trustee is obligated to take control of the asset at the expense of the spouse. As such, the transfer of the asset does not add taxable estate to the surviving spouse.
How Do Credit Shelter Trusts Offer Tax Protection?
Credit shelter trusts are created to make the couples take complete advantage of the estate tax exemptions. The tax law provides that the estate, gift, and generation-skipping transfer tax (GSTT) exemption is occurred at $10 million tax base for single individuals and $20 million tax base for married individuals until December 31, 2025 – taking into consideration that the Congress does not often update the Tax Cuts and Jobs Act until then.
Taking into consideration these figures, suppose the couples who have been in the marriage for a longtime accumulate estate worth $6 each and the husband and the husband create a credit shelter trust to be financed upon his death with his share of their combined estate. After the death of the husband, his portion worth $6 million estates and any income received from the estate is transferred to the wife at estate-tax free since it is an exemption because it falls below the federal exemption.
In this regard, the transfer boosts the net income of the wife to $12 million and past the estate-tax exemption. However, since these assets were out of her control, her taxable estate will still stand at $6 million which still fall within the tax exemption bracket. Therefore, the assets can be transferred to the children upon her death.
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