CREDIT SHELTER TRUST
Back to GlossaryDefinition
A type of irrevocable trust used by married couples to reduce estate taxes by taking full advantage of state and federal estate tax exemptions. It will be formed upon the death of one of the spouses, leaving the maximum tax-exempt amount to children and/or grandchildren, while giving the surviving spouse access to the income from the transferred property without adding it to his or her estate.
Summary
A Credit Shelter Trust, also known as a bypass trust or AB trust, is a tax planning tool designed to help married couples maximize their estate tax exemptions. When the first spouse dies, assets up to the federal estate tax exemption limit are placed into this irrevocable trust for the benefit of children or other heirs. The surviving spouse can receive income from the trust and may have limited access to principal, but the trust assets won't be counted as part of their estate when they die. This strategy effectively allows couples to 'shelter' twice the exemption amount from estate taxes.
Usage Context
This term is crucial when studying estate planning strategies, tax minimization techniques, and wealth transfer methods for married couples. It's particularly important in advanced estate planning courses and when analyzing case studies involving high-net-worth families.
Common Confusions
- Students often think the surviving spouse loses all control over the assets, when they typically retain income rights and limited access to principal
- Confusion about whether this trust is created during lifetime or at death (it's created at death)
- Misunderstanding that this strategy is only beneficial for very wealthy families (it can benefit middle-class families too)
- Thinking that modern portability rules have eliminated the need for Credit Shelter Trusts entirely
