Credit Shelter Trust Definition

Cite this article as:"Credit Shelter Trust Definition," in The Business Professor, updated March 12, 2019, last accessed October 22, 2020,


Credit Shelter Trust (CST) Definition

CST, also called AB Trust or Bypass Trust, is a simple way in which wealthy couples reduce or completely remove inheritance tax when transferring assets to their children. In such a contract, the donor/entrepreneur of the trust dies, assets specified in the contract and the income the generated by the trust is transferred to the heirs.

The remaining spouse will still have the right to the trust’s resources for the rest of her life. The surviving spouse can use the trust money instead of their income to cater for medical bills and educational expenses. After the second spouse dies, their trust property is transferred to the beneficiaries.

A Little More on What is a Credit Shelter Trust (CST)

When one spouse dies, loan protection trust is created and part or all of the ownership is the dead spouse is funded as the contract describes. Since the trust is managed a managed by a designated trustee, the surviving spouse does not manage the assets. Therefore, the assignment will not be added to taxable income of the living spouse.

CST and Tax Protection

With CST, couples are able to take advantage of real estate tax. Congress does not reduce taxes enough for donations and intergenerational duties are at $10 million for individuals. Husbands and wives can accumulate up to $6 million. If the wife aand her husband establishes a trustee of loan agreement and the pooled amount established its share after death. After the death of the husband, her property will be $6 million, the income the husband got was exempted from federal government and so it is not charged on the property of the wife.

After the transfer, the net profit of the wife increase to $12 million dollars and this wi exceed real estate tax. Even when these assets exceed the control of the tax, $6 million will still be subject to inheritance tax. This way, after the death of the second spouse, the asset is transferred to the tax exemption resource.

References for Credit Shelter Trust

Academic Research for Credit Shelter Trust

  • Supercharged Credit Shelter Trust, Gans, M. M., Blattmachr, J. G., & Zeydel, D. S. (2007). Prob. & Prop., 21, 52. This paper observes that most couples consider estate plans to eliminate estate tax on the death of the first spouse but they still take advantage of unified credit, also referred to as applicable exclusion amount. This plan involves setting apart an amount that is sheltered by unified shelter separately and offer that only a portion the amounting excess will qualify for marital deductions. This paper suggests a model that supercharges the credit shelter trust.
  • The secret life of the trust: the trust as an instrument of commerce, Langbein, J. H. (1997). Yale Lj, 107, 165. This article considers trust as a section of gratuitous transfers law. It shows that trusts should be incorporated into the curriculum of law school. Trusts started in the Middle Ages as a means of transferring wealth among family members and it has remained a characteristic device in the transmission of intergenerational wealth.
  • Tax shelters and corporate debt policy, Graham, J. R., & Tucker, A. L. (2006). Journal of Financial Economics, 81(3), 563-594. This paper samples 44 tax shelter cases to examine the effects of tax shelter and the relation between tax shelter and corporate debt policy. It shows that the annual deductions produced by shelters equals almost nine percent of asset value. These deductions are more than three times the interest charged on loans in other companies. Without shelters firms examined in this paper are under levered and with shelters, they do not appear under levered.
  • Credit Shelter Trusts and Probability: Does One Exclude the Other, Bekerman, M. S. (2011). Prob. & Prop., 25, 10. This article examines the relationship between CST and probability. It looks at the many ways the two are related. It also looks at the importance of CST in families that have a lot of property.
  • A Proposal to Make Credit Shelter Trusts Obsolete, Soled, J. A. (1997). The Tax Lawyer, 51(1), 83-107. While CST come in handy minimizing transfer taxes and maximizing wealth, the process of adopting this trust is burdensome. For the unified credit to work, the last will and testament of each spouse needs to establish a testamentary trust for the surviving spouse. This paper analyzes the history of credit shelter trusts and their role in estate plans.
  • Decoupling: Changes to Maine’s Estate Tax Law, Diggins, A. K., & LeBlanc, J. D. (2003). Maine BJ, 18, 140. This paper analyzes the decision to decouple Maine’s estate tax law from the federal estate tax law. It observes that, while federal estate taxes are reducing, estate owners in Maine might have to pay more for their properties.
  • Portability or No: The Death of the CreditShelter Trust?, Blattmachr, J. G., Bramwell, A. W., & Zeydel, D. S. (2013). Journal of Taxation, 118(5), 232-248. This paper looks at the future of credit shelter trust in the face of new statutory choice to elect the surviving spouse to inherit the dead spouse’s estate tax exemption amount. This model is viewed as offering simplicity in property transmission but it is not simple.
  • estate tax repeal under egtrra: a proposal for simplification, Pareja, S. (2003). Real Property, Probate and Trust Journal, 73-98. This paper studies tax repeal and its challenges. It offers a model that simplifies the process making it easier for couples.
  • Federal Estate Tax Portability: Making Sense of Changes in Estate Tax Law, Holbrook, D. (2011). Tenn. BJ, 47, 16. This paper examines the changes in Federal estate tax law which occurred in 2010. In the new law, estate tax and unified federal gift exemptions have been increased. Another good thing comes in form of ‘portability’ which makes the deal better. This paper expounds more on portability as related to the new law.
  • Tax shelters and corporate debt policy, Graham, J. R., & Tucker, A. L. (2006). Journal of Financial Economics, 81(3), 563-594. This paper samples 44 tax shelter cases to investigate the relation between tax shelter and corporate debt policy and the magnitude of tax shelter activity. After the study, the study showed that if shelters are ignored, firms appear under levered and where shelters are considered, firms are not under levered.
  • Avoiding Hazards in Drafting Joint Trusts, Klarquist, S. J. (1999). Prob. & Prop., 13, 24. This paper looks at challenges that couples face when drafting joint trusts and how these challenges can result to hazards. It offers a simplified way to draft joint trusts to escape challenges.
  • Portability of the Federal Estate Tax Exemption, Fee Jr, E. G. (2009). Md. BJ, 42, 34. This paper looks at portability and its role in estate tax exemption. It examines how portability has enhanced adoption of CST.

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