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Maximizing Wealth Through a Credit Shelter Trust

Do estate taxes keep your clients up at night? Do they worry about the amount of money they can pass to their heirs? This is a common concern among high net worth individuals, many of whom worked extremely hard to generate wealth that gives them the peace of mind knowing their spouse, children and grandchildren will be taken care of once they’re gone. For married individuals, a Credit Shelter Trust (CST) may be the right solution to help them avoid estate taxes when passing wealth on to their beneficiaries.

Couple holding handsHow does a CST work?

In the interest of reducing the amount of estate taxes owed on inheritance, credit shelter trusts remove assets from the taxable estate of a married couple. When one spouse dies, a CST is established to hold assets to the federal estate exclusion amount, which is up to $5.34 million per individual in 2014. Then, the rest of the estate is passed to the surviving spouse free of federal estate and income taxes because of the unlimited marital deduction, which gives that spouse the ability to withdraw funds as needed. Through a properly structured leveraged CST, the survivor will then pass on any remaining trust funds to his or her heirs free of federal estate taxes.

Of course, goals vary from couple to couple. If one couple does not plan to withdraw funds from the CST after the death of one spouse, they may simply wish to transfer the wealth to their beneficiaries. To accomplish this, use all or a portion of the trust assets to purchase life insurance, which will help maximize the value and security of the funds.

Benefits of a leveraged CST

  • Tax deferral: A leveraged CST will potentially reduce the amount of income taxes owed on your client’s trust by limiting the income that can be taxed.
  • Flexibility: Your clients may choose to use life insurance to fund their trust or a combination of life insurance and non-life insurance assets.
  • Maximize wealth transfer: The proceeds of life insurance are paid to the trust free of federal income taxes. The distributions to beneficiaries are then free of both federal income and estate taxes.
  • Protection: Your clients’ assets will be protected from potential creditors, liabilities and other unforeseen losses.
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