What is a credit shelter trust?

A credit shelter trust, also known as a bypass trust or a family trust, is a type of irrevocable trust that is commonly used as part of estate planning to minimize estate taxes.

The primary purpose of a credit shelter trust is to maximize the amount of assets that can pass to beneficiaries without being subject to estate tax. When one spouse passes away, the trust is funded with the deceased spouse’s assets up to the estate tax exemption amount (which is currently $12.06 million in 2022). This amount is then not subject to estate tax upon the surviving spouse's death.

The surviving spouse can still benefit from the assets in the trust during their lifetime, such as receiving income generated by the trust or using the trust assets for their benefit. Upon the surviving spouse's death, the assets in the trust pass to the designated beneficiaries without being subject to estate tax.

Credit shelter trusts can be particularly beneficial for married couples with sizable estates, as they can help preserve more wealth for future generations by minimizing estate taxes. However, it is important to consult with an estate planning attorney or financial advisor to determine if a credit shelter trust is the right option for your specific financial situation and estate planning goals.