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Documents Needed to Transfer Assets into a Trust

What Are Credit Shelter Trusts?

The credit shelter trust is a trust that holds an amount of assets from a decedent’s estate that is equal to the portion of allowable tax-free transfer that the decedent didn’t use during his or her lifetime. The allowable tax-free transfer is also called the applicable exclusion amount.

The transfer tax system in the United States allows every person to transfer a certain amount of his or her estate without paying any tax on that transfer. You’re also allowed to make annual gifts — sometimes referred to as annual exclusion gifts — that are small enough to fly under the transfer tax system radar without counting against this nontaxable portion of an estate.

When someone dies, all of his or her assets are added up, including property transferred in excess of annual exclusion gifts, and the total is subjected to estate taxes. At this point, whatever part of the applicable exclusion amount the decedent didn’t use during his or her lifetime is subtracted from the total estate. This portion of the estate funds the credit shelter trust, also called a bypass trust.

Not coincidentally, this is the same value of assets on which the corresponding tax would equal the amount of the unified credit available to the estate if those assets were to be taxed. The unified credit is a lifetime amount of credit that can be used against the federal estate tax upon death.

To accurately fund the credit shelter trust, you must first obtain copies of the decedent’s most recent gift tax return. This return should show how much of the unified credit the decedent used during his or her lifetime.

If the return includes taxable gifts, subtract the total gifts, not the credit assigned to the tax assessed on those gifts, from the total amount of the estate that’s exempt from taxation. The difference is the amount you can use to fund the trust.

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