Credit Shelter Trusts: A Potentially Viable Planning Technique for New Jersey Residents

A Credit Shelter Trust (a/k/a “Bypass Trust” or an “A/B Trust”) is an estate planning technique that can be used by New Jersey married couples with an estate in excess of $675,000.  The trust is established so that upon the death of the decedent, the assets specified in the trust agreement (up to a specified maximum dollar value) are transferred to the trust. 

Interests over the trust that may be given to a surviving spouse inclue:

1. The right to receive income from the trust;
2. Serve as trustee or co-trustee;
3. Receive principal under the ascertainable standard (i.e., for health, maintenance, education and support);
4. A "5 or 5" power; meaning the right to withdraw the greater of 5% of the trust corpus at the beginning of the year or $5,000; and
5. Right to distribute funds among a special or limited class without the trust being included in the surviving spouse's estate by virtue of it being a general power of appointment.

A Credit Shelter Trust defers the payment of estate tax until the surviving spouse passes and generally is drafted so that the assets in the trust will not be included in the estate of the survivor.  This is accomplished by  way of a formula.  The formula typically provides that any excess over the exemption (e.g., $675,000 for New Jersey) passes to the surviving spouse and is eligible for the martial deduction.

Ultimately, the amount with which to fund a Credit Shelter Trust varies according to one's financial and family circumstances. Since the New Jersey estate tax exemption is only $675,000, if the Credit Shelter Trust is funded with more than $675,000, there will be some New Jersey estate tax.  However, since the Credit Shelter Trust is largely a "deferral" technique, it may make sense to pay some New Jersey estate tax now versus later.  This analysis hinges on the fact that New Jersey continues down the path of "de-coupling" from the Federal law as well as your particular facts and circumstances.

For more information please visit my website.  www.millsestateplanning.com.