Credit Shelter Trusts for Estate Tax Savings in New York

Why Make a Credit Shelter Trust

A credit shelter trust can be used to minimize New York estate taxes. It works by letting you port your estate tax exemption to your spouse, so that your total combined estate uses two tax exemptions instead of one. In New York, the current estate tax exemption is $7.16 million (at the time of this article. the number goes up every year). You do not pay any estate taxes if your estate is under that amount. But if your estate is over that amount, the estate taxes can be significant.

The credit shelter trust allows you to combine two exemptions. It lets you keep both the husband's and the wife's exemption and to combine them in the estate of the last-to-die spouse. The combined total exemption would be at least $14.36 million.

Example

Here is an example. Let's say your combined estate is worth $10 million. If you die and everything goes to your wife. There is no estate tax due at the time of your death on the $10 million, because there is no estate tax on spousal inheritance. But when your wife dies, the remaining estate would go to your children. And then, they would have to pay estate tax on any amount over $7.16 million. So there would be an estate tax on $2.84.

Because your exemption went away!

To remedy that situation, we create a credit shelter trust.

Setting Up a Credit Shelter Trust - Just Two Steps!

To get started on this plan, you and your wife split your assets between yourselves. In our example, you now have $5 million each. So no more joint assets. Everything is split up.

Then, your attorney would make a credit shelter trust for you and your spouse. The trusts are not funded yet.

How it Works After You Die

After you die, the assets in your name do not just go to your wife outright. The assets go to her trust instead. She benefit from the assets, but the assets are not included in her estate for tax purposes.

And then when she dies, the kids get the trust assets. They do not pay any estate tax

Because your exemption never went away!

The children also get her assets that she had outside of the trust. They do not pay any estate tax on that either. As a reminder, she had her own estate tax exemption.

As you can see, you do not want to leave your assets to your wife outright, because you would lose the exemption as soon as the assets go to to her. But you also do not want to just leave it to your children, because you do want your wife to benefit from it during her lifetime. A credit shelter trust allows you to combine the best of both worlds. Under the terms of the trust, your wife gets the income from assets and the trust pays for her health, maintenance and support. But she is not considered the legal owner of the assets.

After your wife dies, your children get the remainder of the trust without having to pay estate tax. If the assets would have gone directly to your wife, your children would have still been able to use your wife's tax exemption, but your tax exemption would have been lost forever.

A/B Trust - an optional trust for assets over the exemption

If your combined estate larger than $14.38 mil, then you may benefit from an additional trust. This two-trust combination is called an A/B trust. It's a credit shelter trust that we were talking about earlier, combined with a "marital trust".

The credit shelter trust is the "B" part, "B" is for "bypasss" because it bypasses your wife's estate and goes to the next generation. And "A" is because it's combined with "B", so it makes it easier to remember.

You would place your assets up to the amount of the exemption to a bypass trust, naming your heirs as beneficiaries. The rest of your estate is transferred to a marital trust, naming your spouse as beneficiary. The property transferred to the marital trust is not subjected to estate tax due to the unlimited marital deduction.

In order for the IRS to grant the marital trust a marital exemption, the terms of the trust must include all income going to the wife.

Or, if you choose, you can just leave out the "A" part and have a credit shelter trust with any amount over the exemption going directly to your wife.

And, a credit shelter trust can help you avoid the New York estate tax cliff

New York has an estate tax cliff which subjects the entire estate to estate tax if the gross value of the estate is 105% of the basic exclusion amount. In 2025, the estate tax cliff in New York is $7.518 mil. If the gross value of your estate is over that amount, then the entire gross value of your estate will be subjected to estate tax and not only that portion of the estate. For this reason, it is important to use a credit shelter trust when your total estate is over the New York State exemption amount.

If you would like to discuss if a credit shelter trust is right for you, we at the Law Offices of Albert Goodwin are here for you. Our office is located in New York City. You can call us at 212-233-1233 or send us an email at [email protected].