Credit Shelter Trusts Under NY State Law

A credit shelter trust is a mechanism utilized by married couples in order to take full advantage of their combined estate tax exemptions.  They are most useful for couples who reside in states where there is an additional estate or inheritance tax on top of the federal estate tax.

It is commonly believed that credit shelter trusts need only be used by the ultra-wealthy, as the federal estate tax limit in 2021 is $11.7 million.  This means that the first $11.7 million of a person’s estate is exempt from federal estate taxes.  Taking it a step further, a married couple, utilizing both spouses’ estate tax exemption amount, would not need to pay any federal estate taxes until their combined estates exceed $23.4 million.  The federal estate and gift tax rules also allow for something called portability.  Meaning that if the first spouse to die does not use all of their $11.7 million dollar exemption, the reminder of their exempt amount is portable to the surviving spouse to be used at their eventual death.  However, the surviving spouse must make the election to use their spouse’s remaining estate tax exemption amount at the time of the first spouse’s death.

Unfortunately, it is still possible that a couple may owe estate taxes without proper planning.  This could happen if the surviving spouse failed to elect for portability and the first spouse left their entire estate to the survivor, making their estate larger than the federal estate tax exemption amount.  Estate taxes could also be due because the federal estate tax limit was reduced through legislation between the time a couple drafted their estate planning documents and their deaths, and it could also be because the couple resides in a state that has a separate estate or inheritance tax.

New York state has an estate tax on top of the federal estate tax and New York does not allow the estate tax exemption amount of one spouse to be portable to the other.  The current New York State estate tax exemption amount is $5.93 million.  This means that if a spouse passes away without having done proper planning, they can leave everything to their spouse without paying any taxes due to what is called the unlimited marital deduction, but estate tax will be due on the full amount of their estate and the estate of the spouse upon the death of the second spouse.  As further punishment for failure to plan, if the estate of the second spouse exceeds the New York State estate tax exemption amount, they will be taxed not just on the amount over the limit, but on the full amount at a rate between 5% and 16%.

A credit shelter trust is a simple yet highly effective way to ensure that the full estate tax exemption amount of each spouse is used. A married couple will generally split the value of their combined assets between them and then provide in the credit shelter trust that an amount equal to the estate tax exemption amount at the time be held in trust for the surviving spouse.  This allows the survivor to have the benefit of the assets without passing them directly to the spouse and causing them to be a part of the estate of the surviving spouse and putting them over their own estate tax exemption limit.  The credit shelter trust will have a trustee who will pay any income generated by the trust to the surviving spouse.  The trustee also typically has the discretion to use the trust principal for the benefit of the surviving spouse with certain caveats which should be discussed with your estate planning attorney.

A credit shelter trust should be drafted to meet your family’s unique goals and should never be attempted without the guidance of an estate planning attorney near you.  Call our office today at 347-766-2685 to speak to an experienced estate planning attorney to discuss whether a credit shelter trust is right for you.

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