Credit Shelter Trust

Current tax law gives each taxpayer a unified credit against estate tax which allows the estate of a person dying in 2023 to protect up to $12,920,000.00 from federal estate tax under this provision. A married couple with a combined estate which exceeds $12,920,000.00 in value must consider establishing a credit shelter trust (also called a “CRUT”) either in their will or revocable living trust. While leaving your entire estate to your spouse outright might seem like a good idea because it will result in no federal estate tax on the estate of the first spouse to die, it will cause the surviving spouse’s taxable estate to contain all of the couple’s assets for estate tax purposes. If the total of these assets exceeds $12,920,000.00 (including life insurance) there will likely be a federal estate tax on the surviving spouse’s estate.

A Credit Shelter Trust (also called a “bypass” trust) will allow up to $12,920,000.00 of the estate of the first spouse to die to pass tax free to the next generation, while allowing the surviving spouse to enjoy those assets during his or her lifetime. Since the surviving spouse also has a unified credit, the use of a Credit Shelter trust will allow a married couple to shelter up to $25,840,000.00 from the federal estate tax. Unfortunately, in 2025 the Unified Credit reverts to the 2017 amount of $5,000,000.00 per person, expected to be over $6,000,000.00 adjusted for inflation. Since the Connecticut Estate Tax allows only a $9,100,000.00 exemption per estate in 2022, in addition to the marital deduction, a married couple utilizing the credit shelter trust can shelter only a total of $18,200,000 from Connecticut Estate Tax through the use of Credit Shelter Trusts. The $5,640,000.00 difference between the federal estate tax exemption and Connecticut estate tax exemption presents complicated options to an executor. Current Connecticut law provides that the Connecticut estate tax exemption will equal the federal estate and gift tax exemption for 2023 and beyond which simplifies the executor’s decisions.

The Credit Shelter Trust can be funded either by a mandatory will or revocable trust provision which requires assets to be conveyed to the trust or through a “Disclaimer” provision which allows a surviving spouse to disclaim assets left to him or her and instead direct them into a Credit Shelter Trust. Such a “Disclaimer” allows the surviving spouse to decide the extent to which the Credit Shelter Trust is funded, if at all, during the administration of the estate of the deceased spouse.

Federal estate tax law (but not Connecticut estate tax law) provides for “Portability” of the federal estate tax unified credit. This allows a surviving spouse (or his or her estate) to use a deceased spouse’s unused estate tax exemption as long as portability has been preserved through a proper estate tax return filing in the estate of the first spouse to die. While some surviving spouses might choose to use the Portability provision to shelter his or her estate from federal estate tax, Portability does not exist in Connecticut estate tax law and may result in a higher state estate tax. Finally, use of Portability rather than a Credit Shelter Trust may result in estate taxation of appreciation in estate assets. Appreciation would not be subject to estate taxation if it occurs within a Credit Shelter Trust.

This area of federal and Connecticut estate tax has been in flux for the past several years and likely will see more changes in the years to come. Simple changes by Congress or the Connecticut Legislature can render obsolete even the best estate plans. Taxpayers should regularly consult with their estate planning attorney to make sure their estate plan is current and effective. Attorney Rubino is an experienced tax attorney who will assist you in making the right elections for federal and Connecticut estate tax purposes. He has practiced in this area of the law for over 40 years.

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