Credit Shelter Trust

The credit shelter trust is a simple and popular estate planning tool for married couples.

Many married couples have no will or a simple will that states that all the assets of whoever dies first shall pass to the surviving spouse. Either situation may waste the gift tax credit that is available to both spouses in a married couple, since transfers between couples are already sheltered from these taxes by the unlimited marital deduction.

A credit shelter trust is an irrevocable trust created to take advantage of the gift tax creditGift_Tax_Credit_Schedule>Wide available to both spouses in a married couple. The trust is funded with an amount that exhausts one spouse's remaining gift tax exemption equivalent. This way, the creation of the trust generates no gift or estate tax when it is funded.  At the same time, the trust removes these assets from the grantor's estate.

During the trust term, individuals, typically the surviving spouse, can receive income or principal from the trust depending on its terms.  When the trust terminates, the remaining principal is distributed to heirs.  Since it is an irrevocable trust outside the grantor's estate, this distribution is not subject to gift or estate tax.