Credit Shelter Trust in Estate Planning

A Credit Shelter Trust (CST), also known as a bypass trust or family trust, is a valuable estate planning tool designed to minimize estate taxes and preserve wealth for future generations. It is often used by married couples to take advantage of federal estate tax exemptions while ensuring that assets are distributed according to their wishes.

How Does a Credit Shelter Trust Work?

When one spouse passes away, the estate plan can direct a portion of their assets—up to the federal estate tax exemption limit—into the Credit Shelter Trust. These assets are then held in trust for the benefit of the surviving spouse and, ultimately, for other beneficiaries such as children or grandchildren.

The key feature of a Credit Shelter Trust is that the assets placed into the trust are not included in the surviving spouse’s taxable estate upon their death. This means that the value of the trust is effectively “sheltered” from estate taxes.

Types of Credit Shelter Trusts

  1. Traditional Credit Shelter Trust: This is the most common type of CST, where assets are placed into the trust to fully utilize the estate tax exemption of the deceased spouse. The surviving spouse can receive income and limited access to the principal, but the remaining assets ultimately pass to other beneficiaries.
  2. Disclaimer Credit Shelter Trust: In this type, the surviving spouse has the option to “disclaim” (refuse) a portion of the inheritance, which then passes into the Credit Shelter Trust. This provides flexibility, allowing the surviving spouse to decide how much to place in the trust based on the current estate tax laws and their financial needs.
  3. QTIP (Qualified Terminable Interest Property) Trust: While technically not a pure Credit Shelter Trust, a QTIP trust can function similarly. It provides income to the surviving spouse for life but allows the grantor to control how the remaining assets are distributed after the surviving spouse’s death. This is often used in conjunction with a CST for added tax benefits and control.

Benefits of a Credit Shelter Trust

  1. Estate Tax Savings: By leveraging the federal estate tax exemption, a Credit Shelter Trust reduces the taxable estate of the surviving spouse, potentially saving significant amounts in estate taxes.
  2. Asset Protection: Assets in the trust are generally protected from creditors, lawsuits, and other claims against the surviving spouse.
  3. Control Over Asset Distribution: The trust allows the grantor to specify how and when beneficiaries receive their inheritance, providing more control over the legacy.
  4. Preservation of Family Wealth: By minimizing taxes and protecting assets, a Credit Shelter Trust helps ensure that wealth is preserved for future generations.

Example of a Credit Shelter Trust in Action

Consider a married couple with a combined estate worth $10 million. The federal estate tax exemption is $13.06 million (as of 2025), which means each spouse can shield up to $13.06 million from estate taxes. If the first spouse dies and their share of the estate (e.g., $5 million) is placed into a Credit Shelter Trust, that amount will not be subject to estate tax when the surviving spouse passes away. The surviving spouse can still benefit from the trust during their lifetime, but the assets in the trust are not included in their taxable estate.

Key Considerations

  1. Federal and State Tax Laws: Estate tax exemptions and rates can change, so it’s important to work with an estate planning attorney to stay updated.
  2. Portability of the Estate Tax Exemption: Portability allows a surviving spouse to use the unused portion of the deceased spouse’s exemption, which may reduce the need for a Credit Shelter Trust in some cases.
  3. Trust Administration: A Credit Shelter Trust requires careful management, including adherence to fiduciary duties and potential tax filings.

Conclusion

A Credit Shelter Trust can be an essential component of an effective estate plan, particularly for individuals or couples with significant assets. By strategically utilizing estate tax exemptions, it helps preserve wealth and provides long-term benefits for surviving spouses and future generations. Consulting with an experienced estate planning attorney can ensure that a Credit Shelter Trust is properly structured and aligned with your financial goals.


For more information, please contact NYC Probate Litigation, Guardianship, Probate, and Estate Planning attorney Regina Kiperman:

Phone: 917-261-4514
Fax: 929-556-2089
Email: rkiperman@rklawny.com

Or visit her at:
40 Wall Street
Suite 2508
New York, NY 10005

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