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A credit shelter trust (CST) is an irrevocable trust used by married couples to preserve both spouses' federal estate tax exemptions. When the first spouse dies, assets up to the applicable exclusion amount are placed into the trust rather than transferred outright to the surviving spouse. Those assets, and all future appreciation on them, are permanently excluded from the surviving spouse's taxable estate. The trust benefits the surviving spouse during their lifetime and then passes to heirs estate-tax-free at the second death.
In 2025, the federal estate tax exemption is $13,990,000 per individual. A married couple that funds a credit shelter trust correctly can shelter up to $27,980,000 combined from federal estate tax.
The mechanism is straightforward. When the first spouse dies, their will or revocable living trust directs the executor to fund the credit shelter trust with assets equal to the deceased spouse's remaining estate tax exemption. The surviving spouse can receive income from the trust and may access principal under specific circumstances outlined in the trust document. But the surviving spouse does not own the assets outright, which is the essential feature that keeps them out of the taxable estate at the second death.
Any appreciation inside the credit shelter trust from the date of funding forward also avoids estate tax. If the trust grows from $13,990,000 to $25,000,000 by the time the surviving spouse dies, the entire $25,000,000 passes to heirs with no additional estate tax.
The current elevated exemption of $13,990,000 is scheduled to sunset after December 31, 2025, under the Tax Cuts and Jobs Act. Without new legislation, the exemption will revert to approximately $7,000,000 per person, adjusted for inflation. Couples with estates above that threshold who fail to act before the sunset could lose access to the larger exemption permanently.
Credit shelter trusts become more valuable when the exemption falls. At a lower exemption, more estates face federal tax, and the structure's ability to apply both spouses' exemptions creates a proportionally larger tax benefit.
| Credit Shelter Trust | Portability Election | |
|---|---|---|
| How It Works | Assets fund an irrevocable trust at first death | Unused exemption is transferred to surviving spouse by filing an estate tax return |
| Future Asset Growth | Growth inside trust is permanently outside the taxable estate | All assets and growth remain in the surviving spouse's estate |
| Generation-Skipping Tax Exemption | Can be allocated to trust, creating GST-exempt wealth transfer | GST exemption is not portable; cannot be transferred to surviving spouse |
| State Estate Tax Planning | Can be structured to use state-level exemptions separately from federal | Portability applies to federal exemption only; states with separate taxes may require a trust |
| Complexity | Requires trust drafting, funding, and ongoing administration | Requires timely filing of an estate tax return after first death |
Portability has reduced demand for credit shelter trusts among couples whose combined estate falls well below twice the federal exemption. But several situations still warrant the trust structure. Couples living in states with lower state estate tax exemptions need it to shelter assets from state tax even when no federal tax applies. Couples with significant assets that are expected to appreciate substantially benefit from keeping that future growth outside the taxable estate. Blended families where the first spouse wants to ensure assets ultimately pass to their own children rather than the surviving spouse's new family benefit from the trust's controlled distribution structure.
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