New Mexico Credit Shelter Trust Lawyer

A credit shelter trust provides a way for prosperous couples to provide for their surviving beneficiaries while potentially reducing the tax burdens of their inheritance. The trust is created either before or after the passing of one parent, placing all (or most) of their assets into trust.

This trust becomes separate property from the surviving spouse, which can prevent their estate from increasing past the estate tax exemption amount provided by the IRS. The surviving spouse can still draw income from the trust and, in many cases, still use up to 5% of the principal assets for certain essential purposes.

Also called a bypass trust or family trust, credit shelter trusts have become less common since the massive increase in the amount of estate tax exemptions. However, these legal and financial mechanisms can still provide tangible benefits for certain families under the right circumstances.

In addition to a credit shelter trust, families have alternatives that may offer more advantageous tax savings or income offsets while still providing income to their loved ones, such as a charitable remainder trust. New Mexico Financial & Family Law can discuss all of your options while listening to your personal situation and fielding any questions you may have about estate planning.

Schedule your no-obligation, confidential case review with an experienced New Mexico estate planning attorney today when you call us at 505-503-1637 or contact us online.

When Should You Reach Out to Work With a New Mexico Credit Shelter Trust Attorney?

The most common reason that you may want to look into a credit shelter trust is that you and your spouse own property, assets, and cash that’s likely to be in excess of the estate tax exemption amount for couples.

However, it’s important to note that, historically, the exemption amount for calculating estate taxes has never been higher. While the exemption amount was just $625,000 in 1998, legislation was signed under the Clinton administration that gradually boosted that exemption amount to $1 million.

Expansion of that amount continued rapidly under the George W. Bush administration until the Obama administration set the amount at $5 million, which could be adjusted for inflation in subsequent years.

The 2017 Tax Cuts and Jobs Act caused the exemption amount to practically explode in value. As of 2024, the total exemption amount per individual is $13.61 million.

However, each spouse can now claim this amount, and any amount not claimed by one spouse is now portable to another spouse, effectively creating a $27.2 million exemption per household.

Note that, in 2025, this estate tax exemption amount is set to expire and revert to the Obama-era policy, creating an exemption of roughly $7.14 million. Congress is likely to act on the matter and prevent the exemption from expiring in full, but it still remains to be seen what the exemption amount might be in the upcoming years.

Even at this lower projected amount, though, couples that fall outside of this exemption amount are extremely rare. Additionally, assets from an estate are only taxed by the amount they exceed the exemption, meaning that the impact on beneficiaries could be low if they just barely own more than that amount.

Nevertheless, it is entirely possible for a couple to hold more than $13.61 million individually or $27.2 million collectively. There are also advantages when it comes to certain types of property or depreciated assets when using a credit shelter trust.

The individual creating the credit shelter trust may also have other concerns motivating them to place assets into a trust so that they can be protected for the use of future beneficiaries.

Aside from excess holdings, reasons that a couple might want to consider a credit shelter trust include:

• Wanting to protect certain assets from claims by creditors or civil judgments
• Preserving a specific arrangement for current beneficiaries so that even if the life situation changes for the surviving spouse, that beneficiary will still be taken care of no matter what
• Creating a financial cushion and income for a surviving spouse without leaving the entire estate in their control

Speak to a New Mexico estate planning attorney to learn more about your options for creating a bypass trust or another trust that can provide the benefits you are seeking for your end-of-life planning. Note that there are many financial and legal vehicles available for accomplishing goals that were once well-served by a credit shelter trust, including a Marital 2038 trust or a Joint Exempt Step-Up Trust (JEST trust).

New Mexico Financial & Family Law can help you review all of your available strategies and determine the most effective method for accomplishing your goals for the future. We want to help you provide as much as you can for your eventual beneficiaries while planning ahead for all of those possible unexpected surprises that could come your way.

How Does a Credit Shelter Trust Work?

A credit shelter trust is identical to a bypass trust, which is sometimes referred to as part of an “AB Trust” arrangement.

The structure of these arrangements can be a little complicated, as they typically involve two different trusts created at the time of the death of the asset owner and trust creator (called the “grantor”).

Here’s how it usually works:

• The grantor puts a provision in their will (or another legal document) stating that a trust will be created at the time of their death. Optionally, the trust can also be created during their lifetime, although it doesn’t truly go into effect until they die. Upon the death of the grantor, the trust becomes irrevocable, meaning that it is considered separate property from the grantor’s estate and also separate from the estate of the surviving spouse. This is the credit shelter trust or bypass trust.
• The surviving spouse has the option to place all of their assets into a trust, as well creating another legal entity that effectively reduces the estate size of the couple. This is called the survivor’s trust — or trust “A” in the terminology of an AB trust, with the credit shelter/bypass trust being the “B” trust.
• The surviving spouse is able to draw a moderate income from the credit shelter trust. They can also potentially access up to 5% of the principal value of the trust for certain expenses, such as for medical care, education, and other essentials.
• The assets held in each trust are managed by a trustee. The trustee must file a yearly tax return on the trust, potentially paying taxes for income or capital gains earned by the trust. Note that the trustee may not be a beneficiary of the trust.
• Once the surviving spouse dies, both the credit shelter trust and the survivor’s trust will be distributed to beneficiaries. Beneficiaries report the distributions as income rather than a gift or an estate inheritance, potentially giving them a reduced overall taxation rate.

Another important thing to note is that while the trust must pay taxes on its own income, it can deduct the amount of money that is expected to be transferred to a beneficiary using a distributable net income (DNI) deduction. This technique prevents the money from being taxed twice, and it also moves from the higher trust income tax rate to the (likely lower) income tax rate for the beneficiary.

The beneficiary is also able to wait until they receive the distribution to report the income, possibly allowing them to reduce their total taxes compared to if they had received the inheritance at the time of the first spouse’s death.

Are Assets Held in a Credit Shelter Trust Protected From Creditors and Other Claims?

Yes, in most instances, the assets become the property of the trust itself, not the estate of the decedent, the surviving spouse, or any of the beneficiaries.

This legal arrangement can protect all of the parties above from certain claims by creditors or those seeking the proceeds of a civil judgment. It is for this reason that this type of trust is sometimes called a “credit protection trust” in the first place.

Note, though, that creditors or other claimants may be able to access the contents of a trust if they can prove ownership in fact. If, for example, the surviving spouse is clearly using the principal funds of a trust to support their lifestyle — rather than essential, one-time expenses like home repairs or a medical emergency — then it is possible for a judgment to make the contents of a trust accessible to others.

Anyone wishing to completely avoid any access to the trust’s funds (barring a criminal ruling or order of the United States) should consider creating an offshore asset protection trust.

Using a Credit Shelter Trust to Protect the Original Children of a Marriage

As mentioned above, one benefit to a credit shelter trust is that it can effectively set an inheritance arrangement in stone at the time of the death of the first spouse.

Under most circumstances, the common property of a spouse goes in full to the surviving spouse at the time of their death. The surviving spouse is then free to use the property as they see fit — potentially altering the end-of-life distribution plans originally set forth by the now-deceased spouse.

Not only can this situation result in a spouse spending through the beneficiaries’ entire inheritance, but it can also jeopardize the arrangement in the event that the surviving spouse remarries. They may now have other children and new family members to provide for.

In this situation, it is possible for them to amend the distribution of property contrary to the plans of the original, now-deceased spouse.

By creating a credit shelter trust, a spouse can ensure that their wishes will be fulfilled and that all of their intended beneficiaries will receive the inheritance they expected.

Credit Shelter Trusts Negate the “Step-Up in Basis” for Appreciating Assets

One major drawback to a credit shelter trust is that the value of assets bequeathed to a beneficiary hold the exact value they did at the time they were purchased by the grantor. By comparison, a regular inheritance arrangement allows for a “Step-Up in Basis” that adjusts the value of the assets to the exact moment they are transferred to a beneficiary.

This mechanism means that they do not inherit the asset with a sizable capital gains burden attached to it.

For example, if a father purchased Wonderful Widget stock for $500 in 1990, which is now valued at $50,000 in 2024, a child who inherits this stock through a will typically does not owe any capital gains at the time they receive it. As the stock appreciates further, they use the original value of the stock at the time of their inheritance (in this example, $50,000) to calculate the capital gains obtained.

However, when assets are distributed through a bypass trust, they cannot receive a step-up in basis. The beneficiary is now on the hook for any gains made since the asset was purchased. This situation can create quite a significant tax burden when it comes time to liquidate the asset.

Because of risks like these, it is critical to work with an estate planning attorney and financial advisor to anticipate the tax consequences of any arrangement for future inheritances.

Decide on the Best Path for Your Future With a New Mexico Credit Shelter Trust Law Firm

A credit shelter trust offers many promising benefits — especially if estate tax exemptions roll back to their pre-2017 state in the near future. At the same time, there are many alternatives that could prove more favorable now that estate tax exemption amounts have increased many times over the past few decades.

If you are interested in learning about the best strategies for the future of your legacy and your loved ones, reach out to the attorney team that’s dedicated to giving you confidence about the future. New Mexico Financial & Family Law is eager to assist you and make sense of all the options you have at your disposal.

With our help, you can forge ahead confidently, knowing that you made the best choice for the things you care about most. Discover your best strategy for estate planning when you reach out to our offices at 505-503-1637 or contact us online to schedule a confidential, no-obligation case review.