Albuquerque Credit Shelter Trust Lawyer

A credit shelter trust can preserve the total lifetime estate and gift tax exemptions for someone at the time of their death, which can benefit their surviving spouse and children. This type of trust can also provide a surviving spouse with an income stream if it is arranged to do so.

Creating a credit shelter trust in Albuquerque has become less common since massive increases in estate tax exemptions were passed over the past few decades. Nevertheless, there are still many potential benefits that can be obtained through this rather unique asset ownership vehicle.

These trusts can be especially beneficial to families where there is a chance that the surviving spouse will remarry, which could otherwise complicate inheritances and estate tax exemption amounts.

Refer to an Albuquerque credit shelter trust lawyer for guidance on the best way to take advantage of a trust to achieve your estate planning goals. Call New Mexico Financial & Family Law today at (505) 503-1637 or contact us online to schedule a no-obligation consultation and estate plan review.

What to Discuss When You Meet With an Albuquerque Credit Shelter Trust Attorney

A credit shelter trust can be highly customized. There are many different trust structures available, including how/if/when it pays distributions to the surviving spouse, how the trustee is instructed to manage its contents, and whether the surviving spouse has permission to access the principal funding amount for the trust under certain circumstances.

Before you meet with an Albuquerque credit shelter trust attorney, carefully consider how you might answer questions like the following:

• What are your goals for creating the trust? Are you (or your spouse) concerned about possibly exceeding your lifetime exemption amount for gift and estate taxes?
• What assets do you want placed in the trust? Do you want to preserve as much as possible? Or are you keen to only set aside a few priority elements, like a brokerage account, a business, or a piece of valued property?
• How many children do you have? Do they have grandchildren? Is your goal to gift as much as possible to these descendants tax-free?
• Would you want to provide an income stream to the surviving spouse via the trust? How much would you like it to be? What qualified uses of the distribution do you want to permit?
• Do you want the surviving spouse to be able to access the principal assets of the trust, under certain circumstances? What might these circumstances be?
• Do you want to assign the surviving spouse as the sole trustee? Would you prefer having a neutral third party serve as trustee (or co-trustee)?
• Are you prepared to make an agreement to separate property into the trust, considering that New Mexico is a community property state?
• Do you want to create a joint trust with the possibility of splitting it into two separate trusts later (a common route)? Or would you rather just create one separate trust?
• Do you want to form your trust in New Mexico or in another state with laws that favor your goals? For example, if your primary goal is to shield assets, you may wish to form your trust in a state like Alaska or Nevada.
• Do you wish to include a charity as a beneficiary? Note that creating the credit shelter trust as a charitable remainder trust can have added tax benefits.

An experienced credit shelter trust lawyer in Albuquerque can meet with you to discuss your options and help you prepare the most advantageous trust arrangements possible.

New Mexico Financial & Family Law has earned decades of collective experience assisting our clients with estate planning and trust formation. We listen carefully to your goals and closely review your asset portfolio.

We can then recommend the perfect trust arrangements with your unique situation in mind.

Our attorneys can help you ensure that the language of your trust document fully reflects all of your intentions. We can recommend provisions to include that can balance the protection of the trust assets with providing a financial hedge to a surviving spouse, in case of an emergency.

We can also help you anticipate the trust’s long-term administration costs, tax implications, and other important factors.

Reach out to our firm to get started on your journey towards providing your family with financial security for generations to come.

How Does an Albuquerque Credit Shelter Trust Work?

A credit shelter trust is a relatively common arrangement. In fact, they have been so popular, historically speaking, that they have multiple names, including “bypass trust” and “B trust.”

While credit shelter trusts were even more popular before the large increases we’ve seen in estate tax exemptions, they still have a beneficial place in estate planning.

These trusts work similar to other trusts:

• A grantor (also sometimes called a settlor or trustor) transfers ownership of their assets to a trust
• A trustee (who can be the grantor, while still living) assumes responsibility for managing the contents of the trust, paying distributions to beneficiaries, and following its other instructions, per a guiding trust document
• Beneficiaries eventually receive distributions from the trust. When the contents of the trust have been fully distributed, the trust dissolves.

A credit shelter trust uses all of these arrangements, but it also adds its own unique qualities:

1. The trust must be originally set up during the grantor’s lifetime (a “living trust”)
2. The trust is funded with property designated as separately owned by the grantor
3. If the goal is to preserve lifetime estate, gift, and generation-skipping tax exemption amounts at the time of the grantor’s death, the trust must become irrevocable when the grantor dies
4. The surviving spouse can draw an income from the trust’s investment proceeds for qualified expenses (more on this later)
5. The trust typically lasts until the death of the surviving spouse, whereupon the remainder is distributed to beneficiaries — usually the couple’s children and/or grandchildren

To help explain how a credit shelter trust is able to provide its intended advantages, we will break down each of these five elements below.

Albuquerque Credit Shelter Trusts Must Be Established During the Grantor’s Lifetime to Bypass Estate Taxation

Estate taxes are paid on a person’s total assessed estate at the time of their death. A testamentary trust can be used to transfer estate assets into a trust through a provision in the decedent’s will, but these assets are still considered a part of their estate when they die.

Therefore, these assets are subject to estate taxation.

A living trust, on the other hand, separates property from the grantor’s estate prior to their death. When they die, the property is considered separate and, therefore, not subject to estate taxation.

Bypassing the grantor’s estate accomplishes two main things:

• If the grantor owed debts to creditors at the time of their death, the creditors can only access their estate, not a separate inter vivos trust
• The grantor is able to preserve their remaining lifetime exemption for estate, gift, and generation-skipping taxes

The Credit Shelter Trust Is Funded With Separate Property

Albuquerque lies within a community property state. What this means is that, usually, all property owned by someone becomes the property of their spouse when they die.

A spouse is only allowed to have separate property under certain circumstances, such as if they owned the property before their marriage or if the property was inherited solely by them.

However, spouses can agree to separate their property by mutual consent. Usually, with a credit shelter trust, the couple will establish a joint trust (often called an “A-B trust”) that holds separate property within it.

The couple will need to sign agreements consenting to the separation of the property and its placement within a trust.

This separate status is important because it specifically avoids having the surviving spouse assume sole ownership. Without this preparation, the value of the surviving spouse’s estate could exceed their exemption amount for estate and gift taxes by the end of their life.

The Trust Becomes Irrevocable When the Grantor Dies

A grantor can create a revocable trust and then have that trust convert to an irrevocable one at the time of their death. For the trust to be irrevocable, the surviving spouse (and any other interested parties) must be limited in their ability to decide how the trust is handled, when its contents can be accessed, and the conditions under which it could be dissolved early.

If the surviving spouse is going to be designated as a trustee or co-trustee, they should have their powers to make major changes limited by the trust documentation. Otherwise, the IRS or state revenue agencies might not recognize the unique protections created under a credit shelter trust.

The Surviving Spouse Is Allowed an Income for Qualified Expenses

While a surviving spouse should be limited in how they can use or control the trust, they are able to draw income from the trust. This income is usually restricted to expenses related to the surviving spouse’s health, education, maintenance, and support — collectively known as “HEMS” expenses.

Depending on how the trust is structured, the surviving spouse may be able to access more of the trust in an emergency. To set up this possibility, the trust needs to establish an “ascertainable standard,” and discretion over the matter should be left to a “disinterested” trustee — AKA someone who is neither a beneficiary nor the surviving spouse.

The Trust Distributes Its Remaining Contents to Beneficiaries When the Surviving Spouse Dies

A credit shelter trust usually lasts for the remainder of the surviving spouse’s lifetime. When the surviving spouse dies, the trust is distributed to the couple’s children, grandchildren, and/or other chosen beneficiaries.

When Does a Credit Shelter Trust Make the Most Sense for a Couple in Albuquerque?

There are many reasons why an Albuquerque credit shelter trust might be considered less of a necessity now than in the past. Since estate tax laws have gradually been changed — in both big and small ways — most couples are not as worried about hitting their lifetime estate and gift tax exemptions.

Currently, individuals can exempt up to $13.9 million of their estate from any taxes on gifts or other large transfers of their estate. Couples can combine this amount to obtain nearly $26 million in exemptions. Further, when one spouse dies, the surviving spouse can retain their remaining exemption amount — a legal concept known as “portability.”

Even with these rather generous provisions, couples who don’t have an ultra-high net worth may still choose to use a credit shelter trust for a few prime reasons:

The exemptions and portability factor could change

Creating a credit shelter trust “locks in” the legally allowed exemptions at the time of a spouse’s death. That way, even if laws change, the older exemption is still preserved.

The couple is worried about creditor claims on the joint estate

A credit shelter trust is not technically part of the deceased spouse’s estate, and it’s also not owned by the surviving spouse. If the couple has debts, creditors are generally not able to access the trust, as long as it was formed with these protections in mind.

The surviving spouse could remarry, creating a complicated situation

When a surviving spouse remarries, they may combine some of their estate with their new spouse’s. They may also have a desire to distribute some of their property to any new children or family members, which could include property they inherited from their former wife or husband.

A credit shelter instead designates this property for the beneficiaries named at the time of the deceased spouse’s death. In most cases, this means that the couple’s original children still inherit everything passed on from their deceased parent.

Generation-skipping tax exemptions are preserved

A generation-skipping transfer (GST) tax is placed on assets gifted to anyone 37.5 years younger than the donor. The goal is to recover taxes that would have been paid if the property was first inherited by a child before it goes to a grandchild.

A credit shelter trust can preserve the decedent’s remaining GST exemption, avoiding these taxes in many instances.

High-value but illiquid assets are easier to transfer and hold onto

There may be some cases where a family technically has a high net worth, but their assets are mostly tied up in valuable property that is not easily liquidated. A family-owned business, for example, or a large historic property could feasibly push the household’s estate value past their exemption amount.

A credit shelter trust can take ownership of the assets, instead, and make it less likely that hefty estate taxes are triggered.

Paying Taxes on an Albuquerque Credit Shelter Trust

An Albuquerque credit shelter trust pays taxes on its own proceeds, declaring them annually on IRS form 1041. If a surviving spouse — or any other beneficiary — receives a distribution from the trust, it is taxed according to the original source of the income.

For example, some distributions will come from long-term capital gains, while others stem from ordinary income.

Heirs should also keep in mind that the assets only have their value adjusted (or “stepped up”) once, at the time of the original owner’s death. If the assets appreciate more before they inherit them, then the assets will have unrealized capital gains.

For example, a brokerage account that contains 1,000 shares of ABC company could have had an original purchase value of $10,000. This procurement value is adjusted to the price of the stock at the time of the owner’s death, which could be around $310,000 at that time.

Let’s then say that the stock appreciates further to be worth $510,000 by the time it is inherited by the decedent’s child. When this heir sells all the stock, then they are responsible for paying for that last $200,000 in appreciation, but not the additional $300,000 of appreciation that occurred during the original owner’s lifetime.

Speak with an Albuquerque trust lawyer to know more about the tax implications of your trust. That way, you and your beneficiaries can prepare well in advance for any taxes that could result from trust distributions.

Talk to an Albuquerque Credit Shelter Trust Law Firm to Prepare for Your Family’s Future

A credit shelter trust can provide many advantages, even if you are not worried about exceeding your estate tax exemption amounts. You can work with an experienced Albuquerque credit shelter trust law firm to determine the best way to structure your trust in order to achieve your goals and take full advantage of all the benefits they can offer.

Schedule your no-obligation consultation and estate plan review with New Mexico Financial & Family Law today when you call (505) 503-1637 or contact us online.