The Massachusetts estate tax is a tax imposed on the estate of a Decedent whose assets exceed $2M. For individuals concerned about estate taxes, a Credit Shelter Trust plan can be an effective estate planning tool. This strategy is particularly useful for married couples whose combined estates may exceed the Massachusetts estate tax exemption threshold currently set at $2M as of 2025.
What Is A Credit Shelter Trust?
A Credit Shelter Trust is a revocable trust plan that is typically created as part of a married couple’s estate plan. When the first spouse passes away, an amount up to the $2M Massachusetts estate tax exemption is allocated to this trust. By allocating assets to the trust, the value of those assets is removed from the surviving spouse’s taxable estate and sheltered from the Massachusetts estate tax upon the death of the surviving spouse. This means that the $2M of assets in the deceased spouse’s trust will not be subject to an estate tax on the death of the surviving spouse.
Although the assets in the Credit Shelter Trust are no longer considered part of the surviving spouse’s estate, they can still be used for the surviving spouse’s benefit during their lifetime. This includes income distributions and, in some cases, principal distributions for health, education, maintenance, and support. It is this access by the surviving spouse that can make a Credit Shelter Trust such an attractive planning measure because other methods to reduce estate taxes include permanently and irrevocably giving away assets and not being able to access or use them in the future.
How A Credit Shelter Trust Reduces Estate Taxes
Without a Credit Shelter Trust, all assets typically pass to the surviving spouse outright. While this transfer is generally free from estate tax due to the unlimited marital deduction, it inadvertently increases the surviving spouse’s taxable estate because when the survivor passes away, the entire estate is taxable.
For example: Husband owns $3M in assets and Wife owns $2M in assets. Husband passes away leaving all of his assets to his wife. As a result, when wife passes away, her taxable estate is now $5M, well over the $2M Massachusetts Execempion, triggering an estimated estate tax due of $292,000.
By contrast, a Credit Shelter Trust captures the exemption amount at the death of the first spouse and removes it from the surviving spouse’s estate. Although the assets are held in trust, the surviving spouse can still access the trust assets for health, education, maintenance, or support. Upon the surviving spouse’s death, the remaining assets in the trust pass to the designated beneficiaries (e.g., children) free of Massachusetts estate tax. This can result in significant estate tax savings for families whose assets exceed the state exemption.
For example: Husband owns $3M in assets and Wife owns $2M in assets. Husband and Wife implement a credit shelter trust plan during their lifetime and direct $2M to each of their trusts. When Husband passes away $2M is held in trust and sheltered from the estate tax while the remaining $1M passes to his wife. When Wife passes away her taxable estate is now $3M with an estimated tax due of $82,400.
What Are The Negatives Of A Credit Shelter Trust?
While a credit shelter trust can provide considerable estate tax savings while maintaining access during a married couple’s joint lives and during the lifetime of the surviving spouse, there are several negatives:
- There are set up and administrative costs in developing a tax savings technique like this.
- During the joint lifetimes of the couple these trusts are not separate income taxpayers and so nothing changes on their annual tax reporting. But when one spouse passes away, that spouse’s trust will start filing income tax returns each year increasing the tax preparation fees.
- Assets in the credit shelter trust do not receive a stepped-up basis on the death of the surviving spouse. This is something to monitor closely due to the close interaction between estate taxes and income taxes. In some cases, we have even seen it make sense to dissolve a credit shelter trust that has been in place for awhile whose assets have experienced significant appreciation as the increase in estate taxes caused by the dissolution is significantly offset by income tax savings.
Conclusions Regarding Pros and Cons Of A Credit Shelter Trust
For Massachusetts families, a Credit Shelter Trust can provide peace of mind and substantial estate tax savings. If your combined estate exceeds $2 million, or is expected to in the future, it may be time to discuss this option with an experienced estate planning attorney.