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One of the disadvantages of a credit shelter trust is that it does not give the surviving spouse immediate access or full control over the trust assets. Instead, the spouse can generally receive income from the trust and may be allowed to use the trust principal to pay for health, education, and maintenance as needed.
When the surviving spouse dies, any remaining principal can be distributed to children or remain in trust for their benefit, as you direct. Even though the surviving spouse has access to income (and principal, if needed), the assets in the credit shelter trust are not considered part of the survivors taxable estate.
Additionally, assets that are placed in a credit shelter trust receive a one-time step-up in basis at the time the trust is funded.
Types of Trusts To Minimize Taxes Irrevocable trust: An irrevocable trust is a trust that you cant terminate or change. Grantor retained annuity trust (GRAT): A GRAT is a type of irrevocable trust. Intentionally defective grantor trust (IDGT): An IDGT is another type of irrevocable trust.
One such drawback is their irrevocable nature; once established, the terms are generally set and cannot be easily altered. The surviving spouses estate may also be subject to increased estate taxes upon their death, depending on the trusts structure and the value of the assets.
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No additional tax return: Once a credit shelter trust is funded, the trustee of that trust will have to file a fiduciary income tax return (Form 1041) every year.
When you pass away, the Trustee you have named in the Credit Shelter Trust funds the Trust. This can include any amount up to the lifetime federal estate tax limits (as of 2021, that threshold was raised to $11.7m per person or $23.4m per couple - up from the 2020 limit of $11.58m and $23.16m, respectively).

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