Credit Shelter Trust

A Credit Shelter Trust (also referred to as a By-Pass Trust, Family Trust, or Trust B in an A-B plan) allows a married couple to take full advantage of the applicable credit available to each individual, thereby reducing the couple’s estate taxes and probate costs. The result is that more of the estate is passed to the heirs.

Major Characteristics of a Credit Shelter Trust

At the first death, the will or revocable living trust provides for the establishment of a trust equal to the amount that could be passed tax-free through the applicable credit.
The balance of the estate typically passes to the surviving spouse outright or in a trust which qualifies for the unlimited marital deduction.
The surviving spouse and/or family members may receive income and principal from the Credit Shelter Trust under certain standards.
Care must be taken that no right be granted that causes the trust assets to be included in the surviving spouse's estate.
At the death of the surviving spouse, the assets remaining in the Credit Shelter Trust should not be taxed in the estate of the surviving spouse.

Benefits of a Credit Shelter Trust

The assets remaining in the Credit Shelter Trust at the death of the surviving spouse can pass outright to the heirs or in trust for their benefit; this helps avoid both estate taxation and probate expenses at the surviving spouse's death.
Through proper planning, a married couple may use Credit Shelter Trusts to transfer a defined amount of assets to their children or other beneficiaries free of federal estate taxes. This amount is determined by the applicable credit.
The surviving spouse may be a beneficiary of the Credit Shelter Trust.
The decedent may specify who will receive the remaining assets at the death of the surviving spouse, which can help provide peace of mind.
If a person selects a corporate fiduciary (bank trust department) to serve as trustee or co-trustee, the beneficiaries receive professional asset management.
The amount of the estate passing to the surviving spouse (in excess of what is put in the Credit Shelter Trust) qualifies for the unlimited marital deduction and therefore passes-tax free at the death of the first spouse.