THE CREDIT SHELTER TRUST

The Credit Shelter Trust is generally used in a married couple's estate plan.  It contains the deceased spouse's separate property and his half of the couple's community property, up to the amount of his unused credit against Estate and Gift Taxes.
 
That credit amount was increased as follows:

Deaths in 2002-2003:  $1,000,000.00
Deaths in 2004-2005:  $1,500,000.00
Deaths in 2006-2008:  $2,000,000.00
Deaths in 2009:           $3,500,000.00

(Note that the Estate Tax was repealed on January 1, 2010.  Unless Congress passes new legislation, it will return with a vengeance on January 1, 2011. See the example under the Estate Taxes  button.)
 
That credit amount is protected from estate taxes when the first spouse dies, and will not be subject to estate taxes when the surviving spouse passes away, unless she is the trustee and has too much control over the assets . Too much control can cause the surviving spouse to be viewed as the unrestricted owner of the trust assets, which the IRS might therefore tax as part of her estate. A credit shelter trust accordingly allows the surviving spouse to access the trust assets within the limits of control allowed by the IRS.
 
The surviving spouse can receive all trust income and can invade the principal to the extent necessary for her health, education, maintenance and support.  With the help of an independent trustee, she can take other portions of the trust assets.  She can also spray, or appoint, as much of the trust as she wants to anyone in the world except herself, her creditors, her estate, or the creditors of her estate, taking care not to discharge her own duties of support (like child support) from the trust assets.
 
If the surviving spouse is not a United States citizen, it can be necessary to establish a Qualified Domestic Trust, called a "QDOT."

The surviving spouse's control over trust assets, even within the above limits, can prevent the couple's children from inheriting anything.  Consider Bubbles and Bruno.
 
Estate taxes can be reduced by techniques including lifetime gifts, fractional interest discounts, family limited partnerships and charitable gifts, which are discussed under the Saving Estate Taxes button.

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