What Is a Credit Shelter Trust (CST)?
The credit shelter trust (CST) is created to help couples cut down or completely eliminate estate taxes while passing assets to the heirs (typically children of the couple). This type of trust is set up so that when the trust’s founder (settlor) dies, the assets mentioned in the trust contract and the earnings they generate will be transferred to the spouse of the settlor.
Key Takeaways
- Credit shelter trusts allow couples who want to reduce or eliminate taxes on estates through the transfer of proceeds from individual estates to the estate of their spouse.
- The estate or gift tax, as well as the generation-skipping transfer tax, currently stands at an $13.99 million base rate for singles and a $27.98 million for couples.
- The CST allows a spouse who has died to retain certain rights in the trust assets for the duration of their lives.
- If the spouse of the deceased dies, the trust’s assets are passed to the beneficiaries who remain with no estate tax imposed.
Understanding Credit Shelter Trusts (CSTs)
CSTs are established after the death of a spouse and are funded by the deceased spouse’s entire estate or a part of it, as specified by the trust contract. The assets then go to the spouse who died. But, since the trust is run by a trustee who is designated as the spouse who died, the spouse is not able to control any trust assets. This means that the transfer won’t contribute to the spouse’s taxable estate.
One of the main advantages of such trusts is the fact that the survivor spouse has certain rights to the trust’s assets for the remainder of their lives. If there are specific circumstances, like the need to pay for certain educational or medical expenses, the spouse who died may draw on the trust’s principal instead of only the income. In the event of the death of the spouse who survived the trust, the trust’s assets are given to the remaining beneficiaries without the need to pay estate taxes.
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Credit Shelter Trusts and Tax Protection
CSTs are designed in a way that couples can take full benefit of exemptions from estate taxes. In 2025 the generation-skipping tax (GSTT) exemption amount is $13.99 million, for singles, and $27.98 million for couples filing jointly. The exemption is 13.61 million (individual) in 2024, and $27.22 million (married couples filing jointly). The tax year runs until December. 31st, 2025, unless Congress changes this legislation. Tax Cuts and Jobs Act before that.
Benefits of a Credit Shelter Trust
A credit shelter trust offers advantages that go beyond taxes pertaining to estates. CSTs are a great way to protect your assets from estate tax planning. CST secures any assets owned by a survivor spouse, and offers the flexibility to distribute assets.
Asset Protection
The CST safeguards any assets belonging to a survivor spouse. In the case of the assets of a deceased spouse being at risk of being seized by creditors, and could be wiped out from children, or by a partner. The CST shields these assets against creditors and from being used in a way that is inappropriate by the spouse who died, such as to settle the obligations of a spouse who has changed or their child.
CSTs protect the will of the spouse who died. In an unmarried family, the spouses could wish for their portion of the estate to go to their beneficiaries of choice, for children of previous marriages, for instance, but not only to the beneficiaries of the spouse who died. The CST can assist with this.
There is also a lot of flexibility concerning the trust’s distribution clauses. The trust’s language may include an appointment power that is limited for the spouse who died. So, the spouse who is surviving can distribute the trust’s assets to the beneficiaries in a group (e.g., “the issue of the deceased spouse”).
A good example would be the case of a child who didn’t require a special needs trust at the time that the trust was established, however, after the death of the spouse, it was decided that a Special needs trust would be deemed to be the best option. In this instance, the spouse that is left behind can appoint the assets to a special needs trust that will ensure the child’s needs.
Maximize the Deceased Spouse’s Generation-Skipping Tax (GST) Exemption
The GST exemption is not transferable. The bypass trust may transfer the GST to the GST exemption bypass trust while keeping GST exemption for lifetime trusts. GST exemption for children’s lifetime trusts.
It protects the growth of the assets from estate tax upon the death of the spouse who survived. For instance, an asset worth $5 million or a stock portfolio may be re-allocated to the CST upon the spouse’s decedent’s death. The portfolio can be used by the spouse who is surviving and could expand to $8 million, after which it can be transferred free of estate tax to trust beneficiaries who bypass the trust.
Example of a Credit Shelter Trust
If two wives who have been married for a long time each amass an estate of $9 million. The older spouse sets up a trust for credit shelter to be paid out upon their death by their respective shares of their estate. If the wife who died earlier dies, the $9 million estate as well as the income it generated pass free of estate taxes to their spouse since it is not subject to that exemption of the Federal government.
The transfer, however, increases the wife’s net earnings up to an amount of $18 million. This is more than the exemption for estate taxes. Since these assets were placed in trust, which is not under the control of the younger wife, the trust’s taxable estate is still worth $9 million, which is still within the exemption from estate tax. This means she can transfer her wealth to her children, without having to pay an estate tax if she dies.
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How Do I Terminate a Credit Shelter Trust?
In certain situations, if one spouse dies and the other spouse is alive, the CST can be altered or ended by the trustee on its own or by the trustee with all beneficiaries, or by going to the court. A consent from the beneficiary is usually required.
What Happens When a Credit Shelter Trust Is Depleted?
In some instances, the amount of the gross estate could be diminished by deductions for funeral expenses, or the cost in administering the estate, and may not be enough to be able to utilize the exemption for estate taxes fully. In such a case, the exemption not used up may be retained for the spouse who survives if the executors of the first decedent opt for portability in a timely filed form 706 (United States Estate and Generation-Skipping Transfer tax return).
What Is a Revocable Credit Shelter Trust?
With the revocable credit shelter trust (CST) the settlor, or the person making the CST, writes the trust’s provisions in the will. This trust can be revocable, which means that the settlor can change the terms of the trust at any point throughout their life. It is deemed to be irrevocable after the death of the trustee, and the assets, which are typically what remains of the exemption from estate taxes, will be transferred in trust.
The spouse who survives may earn the income generated by those trust assets. If the surviving spouse dies, the beneficiaries will receive the trust’s assets, without having to pay the estate tax. The trust frees the heirs of worrying about estate tax exemptions not being used.
Conclusion
Credit shelter trusts (CSTs) are referred to by the name of AB trusts or trusts that are exempt from tax. This is because CSTs are trusts in which each spouse owns a separate property that is tax-deductible. The estates are referred to as B trusts and A trusts. CSTs are created after the death of a spouse. It is funded by the estate of the deceased spouse, and is then transferred to a trust which is administered by an administrator. While this won’t affect the estate tax liability of the surviving spouse and the spouse who is surviving might be able to draw upon the principal in certain circumstances, for example, to pay for education expenses.
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