Credit Shelter Trust in Florida

What Is a Credit Shelter Trust?

A credit shelter trust, also known as a bypass trust, family trust, or the "B" trust in an AB trust arrangement, is an irrevocable trust created upon the death of the first spouse to preserve that spouse's federal estate tax exemption. When properly drafted and funded, a credit shelter trust allows a married couple to effectively double the amount of wealth they can pass to their heirs free of federal estate tax. Under the Florida Trust Code, Chapter 736 of the Florida Statutes, credit shelter trusts are governed by the same fiduciary standards and administrative requirements that apply to all trusts administered in Florida.

At the Law Offices of Albert Goodwin, PA, we help married couples throughout the Miami metropolitan area incorporate credit shelter trusts into their estate plans. Proper AB trust planning requires precise drafting to ensure the trust captures exactly the right amount of assets, provides adequately for the surviving spouse, and achieves the intended tax savings.

How a Credit Shelter Trust Works

The basic structure of a credit shelter trust begins with a revocable living trust created during both spouses' lifetimes. The revocable trust is typically drafted as a single trust or as separate trusts for each spouse. Upon the death of the first spouse, the trust instrument directs that a portion of the deceased spouse's assets, up to the available federal estate tax exemption amount, be allocated to the credit shelter trust (the "B" trust). The remaining assets pass to a marital trust (the "A" trust) or outright to the surviving spouse, qualifying for the unlimited marital deduction.

The assets placed in the credit shelter trust are sheltered by the deceased spouse's estate tax exemption and are therefore not subject to federal estate tax at the first death. Critically, those assets, along with any appreciation that occurs after funding, are also excluded from the surviving spouse's taxable estate upon the second death. The surviving spouse can receive income from the credit shelter trust during their lifetime and, depending on how the trust is drafted, may also receive distributions of principal for health, education, maintenance, and support under an ascertainable standard as defined in 26 U.S.C. § 2041(b)(1)(A).

The AB Trust Structure

The term "AB trust" refers to the division of a married couple's trust into two separate trusts upon the first spouse's death. The "A" trust is the marital trust, which holds assets qualifying for the unlimited marital deduction under 26 U.S.C. § 2056. These assets are not taxed at the first death because they pass to the surviving spouse, but they will be included in the surviving spouse's taxable estate at the second death. The "B" trust is the credit shelter trust, which holds assets equal to the deceased spouse's remaining estate tax exemption. These assets are taxed at neither the first death nor the second death, provided the trust is properly structured.

The combination of the A trust and B trust allows the couple to transfer assets equal to twice the individual exemption amount free of estate tax. For example, if the federal estate tax exemption is $13.61 million per individual, a properly structured AB trust plan can shelter up to $27.22 million from federal estate tax for a married couple. Without AB trust planning, the first spouse's exemption may be partially or entirely wasted, depending on how assets are titled and distributed at death.

Portability vs. Credit Shelter Trusts

Since 2011, the federal tax code has included a portability provision under 26 U.S.C. § 2010(c)(4) that allows the surviving spouse to use the deceased spouse's unused exemption (DSUE) without establishing a credit shelter trust. The executor of the first spouse's estate must file a timely estate tax return (IRS Form 706) to elect portability, even if no estate tax is owed. Portability has led some commentators to suggest that credit shelter trusts are no longer necessary, but this view is incomplete for several important reasons.

First, portability does not apply to the generation-skipping transfer (GST) tax exemption. A married couple that relies solely on portability will waste the first spouse's GST tax exemption, which cannot be transferred to the surviving spouse. For families with generation-skipping trust planning objectives, credit shelter trusts remain essential. Second, assets held in a credit shelter trust are not included in the surviving spouse's estate, meaning any appreciation on those assets after the first spouse's death escapes estate tax entirely. With portability, all assets remain in the surviving spouse's estate and are taxed at their date-of-death value, including any appreciation. Third, portability can be lost if the surviving spouse remarries and the new spouse predeceases them, because the surviving spouse can only use the DSUE from the last deceased spouse. A credit shelter trust locks in the first spouse's exemption permanently, regardless of what happens afterward.

The TCJA Sunset and Why Credit Shelter Trusts Matter Now

The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily doubled the federal estate tax exemption from approximately $5.49 million to $11.18 million per individual, indexed for inflation. As of 2024, the exemption stands at $13.61 million per individual. However, the TCJA's increased exemption is scheduled to sunset on December 31, 2025, at which point the exemption will revert to approximately $5 million, adjusted for inflation, which is expected to be around $7 million per individual.

This scheduled reduction makes credit shelter trust planning particularly urgent for married couples with combined estates between approximately $7 million and $27 million. Couples in this range may currently be below the estate tax threshold but will be exposed to estate tax after the sunset. A properly structured credit shelter trust created before or as part of an estate plan that accounts for the sunset can preserve both spouses' exemptions at the higher levels and protect the family from a significantly increased estate tax burden.

Even couples who have already executed estate plans should review their existing trust documents. Many older AB trust plans contain formula clauses that automatically fund the credit shelter trust with the maximum amount sheltered by the estate tax exemption. Under the current high exemption, this formula could allocate the entire estate to the B trust, leaving nothing for the surviving spouse in the A trust or outright. Conversely, some plans drafted after portability became available may have eliminated AB trust provisions entirely, which could result in wasted exemptions after the sunset. A thorough review of existing estate planning documents is essential in light of these changes.

Florida-Specific Considerations for Credit Shelter Trusts

No State Estate Tax

Florida does not impose a state estate tax or inheritance tax. This is a significant advantage for Florida residents compared to residents of states like New York, Massachusetts, or Connecticut, which impose state estate taxes with exemption levels far below the federal exemption. Because there is no Florida estate tax to plan around, the credit shelter trust in a Florida estate plan is focused exclusively on the federal estate tax exemption. This simplifies the funding formula and eliminates the need for the complex "state-only" QTIP elections that are required in states with decoupled estate taxes.

Homestead Property Considerations

Florida's homestead laws, found in Article X, Section 4 of the Florida Constitution and F.S. § 732.401, impose restrictions on how a married person can dispose of their homestead property at death. A married individual cannot devise homestead property to anyone other than the surviving spouse if the spouse has not waived their rights, unless the property passes to the surviving spouse as a life estate with a vested remainder to the decedent's descendants. These restrictions can complicate the funding of a credit shelter trust because the family home, which may be one of the most valuable assets in the estate, may not be available to fund the B trust without the surviving spouse's consent.

Additionally, under Florida homestead protection, the property is exempt from the claims of creditors. Transferring homestead property into a credit shelter trust could affect this exemption, so careful analysis is required. At the Law Offices of Albert Goodwin, PA, we structure credit shelter trust plans that account for Florida homestead restrictions while maximizing the estate tax benefits of the bypass trust.

Trust Administration Under the Florida Trust Code

After the first spouse's death, the credit shelter trust becomes irrevocable and must be administered in accordance with the Florida Trust Code, F.S. Chapter 736. The trustee of the B trust has a fiduciary duty under F.S. § 736.0802 to administer the trust solely in the interests of the beneficiaries and in accordance with the terms of the trust. The trustee must provide accountings to qualified beneficiaries under F.S. § 736.0813, maintain adequate records, invest trust assets prudently under the Florida Prudent Investor Act (F.S. § 518.11), and file any required income tax returns for the trust.

The surviving spouse, as the primary beneficiary of the credit shelter trust, has rights under Florida law to information about the trust and its administration. Disputes between the surviving spouse and remainder beneficiaries (typically the couple's children) regarding trust distributions and investments are a common source of trust litigation. Careful drafting of the trust's distribution standards and investment provisions can reduce the risk of such disputes.

Funding the Credit Shelter Trust

Proper funding of the credit shelter trust is essential to achieving the intended tax benefits. The trust instrument typically contains a funding formula that directs the trustee to allocate assets to the B trust equal to the deceased spouse's remaining federal estate tax exemption after accounting for any taxable gifts made during life. The formula must be drafted carefully to avoid overfunding or underfunding the trust.

Common funding formulas include the pecuniary amount formula, which directs a specific dollar amount equal to the exemption to the B trust, and the fractional share formula, which allocates a fraction of each asset based on the ratio of the exemption to the total estate value. Each formula has different tax and practical implications, particularly with respect to whether appreciation between the date of death and the date of funding is allocated to the A trust or the B trust.

Assets that fund the credit shelter trust receive a stepped-up basis to their fair market value at the date of death under 26 U.S.C. § 1014. This stepped-up basis can be a significant income tax benefit, as it eliminates any capital gains tax on appreciation that occurred during the deceased spouse's lifetime. The trustee should consider the basis and character of assets when selecting which assets to allocate to each trust.

Credit Shelter Trust for Blended Families

Credit shelter trusts are particularly valuable for couples in second or subsequent marriages who want to provide for the surviving spouse while ensuring that the deceased spouse's children from a prior marriage ultimately receive their inheritance. The credit shelter trust can be structured to provide income and limited principal distributions to the surviving spouse for life, with the remainder passing to the deceased spouse's children upon the surviving spouse's death. This structure balances the competing interests of the surviving spouse and the deceased spouse's descendants, a concern that is especially common in South Florida's diverse community.

For additional protection of the surviving spouse's interests, the credit shelter trust is often paired with a marital trust (QTIP trust) that provides the surviving spouse with income for life while preserving the deceased spouse's ability to direct the ultimate disposition of the remaining assets.

Contact a Miami Credit Shelter Trust Attorney

Credit shelter trust planning remains one of the most effective strategies for married couples to minimize federal estate taxes and protect wealth for future generations. With the scheduled sunset of the TCJA's increased estate tax exemption, the need for proper AB trust planning is more pressing than ever. Whether you need to establish a new credit shelter trust, update an existing AB trust plan to account for current tax law, or address Florida homestead and trust administration issues, the Law Offices of Albert Goodwin, PA can help.

We represent individuals and families throughout Miami-Dade County, Broward County, and Palm Beach County in all aspects of estate tax planning and trust administration. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134. To schedule a consultation, call us at 786-522-1411 or email [email protected].