An A/B Trust is any type of trust that splits into two separate and distinct trusts upon the death of the grantor. One of the separate and distinct trusts is a Credit Shelter Trust, which is designed to hold as much of the grantor's property as is sheltered from the federal estate tax by virtue of the unified credit; i.e., $2,000,000 for decedent's dying in years 2006, 2007, and 2008, and $3,500,000 for decedent's dying in the year 2009. The other separate and distinct trust is a Marital Trust, which is designed to hold the remainder of the decedent's property, which is sheltered from the federal estate tax by virtue of the unlimited marital deduction. These separate and ...view middle of the document...
For further information on this subject, please see Quatloos' article on Domestic Asset Protection Trusts.
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A "By-Pass Trust" is another name for a Credit Shelter Trust. This type of trust is often called a "Credit Shelter Trust" because it shelter's property from federal estate taxation by virtue of the unified credit. For the amount of property that can be placed in this type of trust and sheltered from federal estate taxation by virtue of the unified credit, see "Applicable Exclusion Amount." Many people also refer to this type of trust as a "By-pass Trust" because the property placed in this trust is not subject to federal estate tax in the surviving spouse's estate. In other words, it "by-passes" the surviving spouse for federal estate tax purposes. The net result is that property placed in this type of trust (whether you call it a "Credit Shelter Trust" or a "By-Pass Trust" or a "Family Trust") is not subject to federal estate taxation in either spouse's estate.
A By-Pass Trust can be created under a living trust or a testamentary trust, since these provisions do not take effect until after the grantor's death. See "Credit Shelter Trusts" and "Family Trusts."
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Credit Shelter Trusts
A Credit Shelter Trust is a type of trust that is used by married couples with large estates in order to avoid federal estate taxes upon the death of the first spouse to die. This type of trust is structured so that, upon the death of the first spouse to die, the maximum amount of property sheltered from the federal estate tax (by virtue of the unified credit) is transferred to this trust. The trust is designed so that the assets in this trust will not be subject to the federal estate tax in the surviving spouse's estate upon his or her subsequent death. As a result, the assets placed in this trust upon the death of the first spouse to die will not be subject to federal estate taxes in either spouse's estate and will be transferred to other beneficiaries (normally the children) free of any estate taxes.
Even though the assets in a Credit Shelter Trust will not be taxed in the estate of the surviving spouse, the trust is designed in such a way that the surviving spouse can enjoy the benefits of the assets placed in this trust. For example, the surviving spouse can have the right to receive all the income of the trust during his or her lifetime. Although the surviving spouse cannot be given the right to demand any of the principal of the trust (an exception is the so-called "5 and 5 power"), the trustee can have the discretion to distribute principal to the surviving spouse for specified purposes.
This type of trust is also referred to as a "By-Pass Trust" because the assets placed in this trust effectively by-pass the surviving spouse for federal estate tax purposes. Some people also refer to this type of trust as a "Family Trust" in order to distinguish it from a "Marital...