A credit shelter trust (CST) is a unique estate-planning tool many families use to protect heirs. It's a type of irrevocable trust that dictates what happens to assets after someone dies. The goal is to reduce or avoid estate taxes upon death while giving surviving spouses and surviving heirs many tax advantages. Secure your legacy: explore credit shelter trusts for effective estate planning. Visit now!

Typically, these trusts establish and go into effect upon an individual's death. However, they require careful planning with an estate lawyer before one's death to maximize its benefits. A CST is also known as Bypass trust or AB trust.

How A CST Works

The concept of a CST is straightforward. When someone dies, estate attorneys create a CST and use all or part of the deceased person's estate to fund it. When planning a CST, you must choose a designated trustee. Because it's an irrevocable trust, surviving spouses and heirs cannot control the assets.

While the lack of control may seem a disadvantage, this detail is what makes a CST beneficial. Because a trustee manages the CST, those assets don't add to the spouse's taxable estate.

The spouse still maintains certain rights. For example, a spouse could tap into the trust's principal to pay for medical or educational expenses. They can also use the income generated by the trust for the remainder of their lifetime. For highly affluent couples, the assets within the CST or Bypass trust are enough to support surviving spouses their entire lives.

Whenever the surviving spouse dies, the CST assets transfer automatically to remaining beneficiaries, such as children. Because the assets bypassed the surviving spouse, the heirs get the assets with no estate taxes levied.

Typically, heirs must pay taxes on estates when descendants die. The estate, gift and generation-skipping transfer tax (GSTT) rate applies to anything above the exemption amount. For 2023, the exemption is $12.92 million for individuals. Anything above that figure gets taxed at 30 percent.

This unique trust's biggest benefit is that it helps bypass those tax responsibilities. It's a great way to support surviving spouses while dramatically reducing estate tax liabilities for heirs.

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