What is a credit shelter (also known as an A/B) trust?
Each person is allowed to pass to their heirs, tax free, a specific amount of money, as described in the question above. Without an estate plan, when one spouse dies, the other receives all assets free of tax by use of the Marital Deduction. This can create great tax problems upon the death of the surviving. Because the marital deduction is used, the first spouse to die loses the exemption because it is never used. When the second spouse dies, the heirs are only left with that person’s $1,000,000 exemption. In creating a credit shelter (or A/B) Trust during both of their lifetimes, we can claim an exemption for both spouses. When the first spouse passes away, we place the amount of the exemption into a special Trust (Trust B). The surviving spouse can still use the assets as needed, but exemption is preserved, allowing the heirs to use a $2,000,000 exemption.
