What is a Credit Shelter or A/B Trust and how does it work?
A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax. For example, in 2007, every individual is entitled to an estate tax exemption on the first $2 million of their assets. This amount is scheduled to rise to $3.5 million in 2009. Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them. This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate is then subject to estate tax on the amount exceeding the exemption. Meanwhile, the first spouse’s estate tax credit was unused an
