What is a 'Credit Shelter Trust - CST'

A Credit Shelter Trust is designed to allow affluent couples to reduce or completely avoid estate taxes when passing assets on to heirs, typically the couple's children. This type of irrevocable trust is structured so that upon the death of the trust's creator or settler, the assets specified in the trust agreement and the income they generate are transferred to the settlor's spouse. 

However, a key benefit to this type of trust is that the surviving spouse maintains certain rights to the trust assets during the remainder of his or her lifetime. Under specific circumstances such as the need to fund certain medical or educational expenses, the surviving spouse can tap into the trust's principal and not just the income. And upon the surviving spouse's death, the trust's assets are transferred to the remaining beneficiaries without any estate taxes levied.

BREAKING DOWN 'Credit Shelter Trust - CST'

Credit shelter trusts are created upon a married individual's death and funded with that person's entire estate or a portion of it as outlined in the trust agreement. These assets then flow to the surviving spouse. But because the trust is managed by a designated trustee, the surviving spouse never actually takes control of the trust's assets. Therefore, the transfer does not add to the surviving spouse's taxable estate.  

How Do Credit Shelter Trusts Offer Tax Protection?

Credit shelter trusts are designed so that couples can take full advantage of estate tax exemptions. The estate, gift and generation-skipping transfer tax (GSTT) exemption currently stands at a $10 million base for individuals and $20 million base for couples until December 31, 2025 — considering Congress doesn't drastically update the Tax Cuts and Jobs Act until then. 

Considering these numbers, suppose a husband and wife who have been married for several years each accumulates an estate worth $6 million and the husband sets up a credit shelter trust to be funded upon his death with his share of their combined estate. After the husband dies, his $6 million estate and any income it generated passes estate-tax free onto his wife because it falls below the federal exemption.

However, the transfer boosts the wife's net income to $12 million and past the estate-tax exemption. But because these assets were held in the trust outside of her control, her taxable estate is still valued at $6 million and still within the estate-tax exemption. Thus, she can pass on her assets to her children estate-tax free when she dies. 

Credit shelter trusts are also known as AB Trusts or Bypass Trusts. 

RELATED TERMS
  1. A-B Trust

    An A-B trust is a joint trust created by a married couple for ...
  2. Exemption Trust

    A trust whose purpose is to drastically reduce or eliminate federal ...
  3. Trust Fund

    A trust fund is comprised of a variety of assets established ...
  4. Disclaimer Trust

    A disclaimer trust is one that has embedded provisions that allow ...
  5. Bare Trust

    A bare trust is a type of trust that provides beneficiaries with ...
  6. Irrevocable Income-Only Trust - ...

    A type of living trust often used for Medicaid planning. It protects ...
Related Articles
  1. Retirement

    Estate Planning for Beginners, Part Five: Credit Shelter Trusts

    Credit shelter trusts provide these advantages in an estate plan.
  2. Retirement

    Estate Planning For Canadians

    Trusts, wills, taxes and rules differ by country. Find out what you need to know about estate plans in Canada.
  3. Retirement

    When Does the Benefit of a Trust Outweigh the Cost?

    Setting up a trust can be costly, but having a living trust in these situations can be beneficial.
  4. Personal Finance

    Buying a Home in Trust

    Buying a home in a real estate trust allows for tax advantages, possibly avoiding probate court, and future family conflict. Below we outline the two different types and what to arm yourself ...
  5. Managing Wealth

    Surprising Uses for Trust Funds

    Here are five common situations where a trust fund makes financial sense.
  6. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
  7. Investing

    A Look Into Creating a Trust Fund With ETFs (VCIT, SDIV)

    Learn the basics of how a trust works and the two most common types. Discover how to use ETFs to fund a trust and the different strategies.
  8. Retirement

    Which estate transfer technique is right for you?

    This article explains the difference between the two estate transfer methods — will and trust — and the circumstances under which each can be used.
  9. Managing Wealth

    How ING Trusts Have Surprising Tax Advantages

    Learn how ING trusts can be used to shield assets from state income taxes and provide additional protection for high-wealth individuals.
RELATED FAQS
  1. How can a trust lower federal transfer tax liability?

    A trust is an arrangement in which an individual or entity controls property or funds on behalf of someone else without actually ... Read Answer >>
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center