For married couples, deciding how assets should pass after the first spouse dies can be an important part of estate planning. Marital trusts and credit shelter trusts are two tools that may be used to provide for a surviving spouse while addressing tax, beneficiary, and asset distribution goals. Although they can work together, they have important differences.
What is a marital trust?
A marital trust generally holds assets for the benefit of a surviving spouse. When properly structured, assets passing to the trust may qualify for the federal estate tax marital deduction, generally allowing them to pass without federal estate tax at the first spouse’s death. Depending on the trust’s terms, the surviving spouse may receive income and have access to principal, while the trust can specify who ultimately receives the remaining assets. Assets remaining in many types of marital trusts generally are included in the surviving spouse’s taxable estate at death.
How does a credit shelter trust work?
A credit shelter trust, also called a bypass or family trust, generally is funded at the first spouse’s death with assets intended to use some or all of that spouse’s available federal estate tax exclusion. The surviving spouse may be a beneficiary, but the trust generally is structured so its assets are not included in the surviving spouse’s taxable estate at death. The remaining assets then pass to other beneficiaries according to the trust’s terms. In addition to potential estate tax benefits, a credit shelter trust can provide greater control over how assets ultimately pass to beneficiaries. This may be particularly useful in blended families or other situations where someone wants to provide for a surviving spouse while preserving assets for children or other beneficiaries.
Comparing the two strategies
The key distinction is how the assets are treated for estate tax purposes. Assets in a qualifying marital trust generally qualify for the marital deduction at the first spouse’s death but may be included in the surviving spouse’s estate later. Assets properly placed in a credit shelter trust generally use the first spouse’s available estate tax exclusion and are structured to remain outside the surviving spouse’s taxable estate. An estate plan may use one or both strategies depending on the couple’s assets, family circumstances, beneficiary goals, applicable tax laws, and desired level of control.
How portability affects the decision
Portability provides married couples with another estate planning option. An executor may elect to transfer a deceased spouse’s unused federal estate and gift tax exclusion—known as the deceased spousal unused exclusion, or DSUE—to the surviving spouse. For individuals who pass away in 2026, the federal basic exclusion amount is $15 million. A portability election generally is made by filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, even when an estate otherwise may not be required to file a federal estate tax return. Because of portability, a credit shelter trust may not be necessary solely to preserve the first spouse’s unused federal exclusion. However, trusts may still offer benefits related to control of assets, asset appreciation, beneficiaries, state estate taxes, and other planning objectives.
Don’t overlook income taxes
Income tax consequences should also factor into the decision. Generally, assets included in a decedent’s estate receive a basis adjustment at death. Assets in a credit shelter trust that are excluded from the surviving spouse’s estate generally do not receive another basis adjustment simply because the surviving spouse dies. This can be significant when assets appreciate substantially. A strategy that reduces estate tax exposure may have different capital gains tax consequences for beneficiaries, making it important to consider estate and income taxes together.
Choosing the right approach
There is no single strategy that works for every married couple. The size and composition of the estate, anticipated asset growth, state estate tax rules, family dynamics, the surviving spouse’s financial needs, and plans for other beneficiaries can all influence the decision. Careful coordination among your estate planning attorney, CPA, and other advisors can help ensure these considerations are evaluated together. SEK’s Estate Planning team can help you understand the tax implications of marital and credit shelter trusts and work with your other advisors as you evaluate your estate plan. Contact us to discuss your estate and trust planning needs.
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