Credit Shelter Trusts: Estate Planning Options for Larger Estates

Credit Shelter Trusts (CSTs), commonly referred to as a bypass trust, B trust, exemption trust, or family trust, is an irrevocable trust used to help married couples transfer assets upon their death to their surviving spouse and, ultimately, their children.  

Because the trust is irrevocable, the trust provisions must be detailed in order to accommodate the surviving spouse’s lifestyle needs.  This also means that, rather than put all of the responsibility on the surviving spouse to carry out the decedent’s wishes, the first spouse to die controls where the CST’s assets are distributed after the surviving spouse’s death.  In layman’s terms, the first spouse to die decides where all of the assets go, regardless of when the surviving spouse dies.  This takes a lot of the burden off of the surviving spouse – rather than worry about carrying out the decedent’s wishes, the surviving spouse can process their grief and live out the rest of their life.

In addition to taking some of the responsibility off of the surviving spouse, CSTs are also estate tax-exempt and the trust’s assets are protected from the beneficiary’s creditors.  This means that the trust’s resources and income are protected at the government, state, and private collection company level.

Regardless of all of the benefits of forming a CST, there are some things to consider.  As with most things, a crucial consideration is time commitment.  Although some tax exemptions apply to CSTs, they are still subject to income taxes.  When forming a CST, you are required to obtain an EIN for the trust, ultimately subjecting it to income tax provisions.  The level of complexity of those taxes reflects in the intricacy of the trust.  Ultimately, if the trust is complicated, the income tax process could prove to be quite involved and expensive.

Even though the income tax provisions open up the possibility of increased financial burden, Credit Shelter Trusts are primarily used by those who come close to or exceed the allowable estate tax exemption.  As of 2021, the estate tax exemption was $11.7 million for individuals and $23.4 million for married couples.  Because the majority of people’s estates do not come close to this amount, people are more likely to go with another trust option.  

To see if a Credit Shelter Trust is right for you and your family, give us a call to set up a consultation at 251-621-1555.

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