Marital vs. Credit Shelter Trusts: How to Choose

Quick overview

Marital and credit shelter trusts are often used together in a “A/B” or “credit shelter” estate plan to provide for a surviving spouse while locking in the deceased spouse’s federal estate tax exemption for children or other beneficiaries. These trusts let couples balance lifetime support for a spouse with long-term tax and legacy goals.

This article explains how each trust works, when to use them, funding and filing considerations, state tax issues, pros and cons, and practical steps you can take. It also links to related FinHelp resources on estate planning and portability for further reading.

How each trust works

• Marital trust (A trust)

• Purpose: Provide liquidity, income, or principal to the surviving spouse so they can maintain their standard of living.

• Tax treatment: Qualifies for the unlimited marital deduction (transfers to a U.S. citizen spouse are generally not subject to federal estate tax at the first death). For a non‑citizen spouse, a Qualified Domestic Trust (QDOT) is often required (see IRS guidance).

• Control: The deceased spouse can restrict ultimate beneficiaries (for example, leave principal to children after the surviving spouse dies).

• Credit shelter trust (B trust, bypass trust, or family trust)

• Purpose: Use the deceased spouse’s federal estate tax exemption to shelter a portion of assets from estate taxation when the surviving spouse dies.

• Tax treatment: Assets placed in the credit shelter trust are outside the surviving spouse’s taxable estate (if properly structured and funded), so they pass to named beneficiaries free of additional federal estate tax.

• Access: The surviving spouse may receive income and, in some cases, limited principal for health, education, maintenance, and support (HEMS) depending on the trust terms.

These two trusts together let couples achieve immediate financial security for the surviving spouse while preserving wealth for the next generation.

When each structure is most useful

• Use marital trust when:

• The surviving spouse needs easy access to income and principal.

• You want to defer estate tax until the survivor’s death and are comfortable the surviving spouse will have access to assets.

• Use credit shelter trust when:

• Your combined estate may exceed the estate tax exemption (or you want to guarantee use of one spouse’s exemption).

• You want assets to bypass the surviving spouse’s estate to protect them for children or other beneficiaries.

In practice, many advisors recommend an A/B split for couples with estates near or above the federal exemption or where family dynamics (second marriages, blended families) make preserving separate inheritances important.

Portability and alternatives

Portability lets a surviving spouse use a deceased spouse’s unused federal estate tax exemption by filing an estate-tax return (Form 706) and electing portability. That election can simplify planning for some couples and reduce the need for a credit shelter trust, but portability has limits:

• Portability requires timely filing of Form 706 (generally within nine months of death, though an extension may be available).
• It preserves the unused exemption amount but does not protect future appreciation of the assets from estate tax nor provide creditor or remarriage protection the way a credit shelter trust can.

For a deeper look at portability, see FinHelp’s explainer on portability of the estate tax exemption.

State estate and inheritance taxes

Federal law is only part of the picture. Several states have estate or inheritance taxes with exemption amounts and rules that differ from federal law. When choosing trusts, consider state-level exposure and whether a credit shelter trust or other state‑specific planning tools are appropriate.

Check state rules with a qualified estate attorney and consult the IRS and CFPB pages on estate planning for general guidance (IRS: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax; CFPB: https://www.consumerfinance.gov/consumer-tools/estate-planning/).

Funding the trusts and administration

Creating trusts isn’t enough — you must fund them. Common funding steps:

1. Re-title assets (real estate, brokerage accounts, bank accounts, some life insurance policies) into the trust name where appropriate.
2. Update beneficiary designations (IRAs and employer retirement accounts often pass by beneficiary designation and need careful coordination). Note: transfers of IRAs to a trust have special tax implications.
3. Keep detailed inventory and beneficiary contact info to help the trustee administer the trusts smoothly.

Failure to fund trusts properly is a frequent and costly error. For technical filing rules and trust reporting, see FinHelp’s guide to trusts and estate tax filing requirements.

Pros and cons — quick comparison

• Marital trust

• Pros: Flexible, immediate support for survivor, takes advantage of unlimited marital deduction for U.S. spouses.

• Cons: Assets may be includable in the surviving spouse’s estate later; less protection from creditors or remarriage.

• Credit shelter trust

• Pros: Locks in the deceased spouse’s exemption, protects assets for beneficiaries, offers creditor protection and control over final distributions.

• Cons: More complex to draft and administer, can limit the survivor’s access to principal, may require trustee oversight and tax filings.

Practical checklist for deciding

1. Inventory assets and estimate current combined estate value (don’t rely solely on rough numbers).
2. Confirm whether both spouses are U.S. citizens (QDOT needed for non‑citizen spouses).
3. Discuss goals: survivor liquidity vs. preserving inheritances for children or other heirs.
4. Consider portability vs. credit shelter trust based on asset size, likely appreciation, and family dynamics.
5. Coordinate beneficiary designations and retirement account planning with trust documents.
6. Work with an estate planning attorney and CPA to draft, fund, and document the plan.

In my practice, I find that couples with closely held business interests, pensions, or assets likely to appreciate benefit most from a credit shelter trust — portability won’t protect post‑death appreciation the way a funded B trust can.

Common mistakes to avoid

• Setting up trusts and not funding them.
• Assuming portability makes a trust unnecessary without examining asset appreciation or state taxes.
• Forgetting to update beneficiary designations on retirement accounts and life insurance.
• Using boilerplate trust language without tailoring for your state law and family circumstances.

Real-world example (illustrative)

A married couple has assets they reasonably expect to grow substantially (real estate and a family business). Rather than rely solely on portability, they fund a credit shelter trust with an amount equal to the deceased spouse’s exemption at first death. The surviving spouse receives income from the trust but cannot freely deplete principal. When the survivor dies, the trust assets pass to the children free of additional federal estate tax and with protection from the survivor’s creditors.

This approach cost more in drafting and trustee fees but achieved the couple’s long-term legacy goals.

Frequently asked questions

Q: Does a marital trust eliminate estate tax at the first death?
A: Transfers to a U.S. citizen spouse qualify for the unlimited marital deduction at the first death, so those transfers aren’t taxed at that time. However, assets controlled by the surviving spouse may be includable in their estate later.

Q: Can I change these trusts later?
A: Yes — revocable trusts can be changed during the grantor’s life. Irrevocable trusts are harder or impossible to change without consent or court involvement. The best course is to design for flexibility where appropriate and review periodically.

Q: What paperwork is required to make portability effective?
A: Portability requires filing an estate tax return (Form 706) and electing portability within the required filing window (generally nine months, with extension options). Consult a tax professional for filing strategy.

Sources and further reading

• IRS — Estate Tax overview: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
• CFPB — Estate planning basics: https://www.consumerfinance.gov/consumer-tools/estate-planning/
• FinHelp — Estate Planning: https://finhelp.io/glossary/estate-planning/
• FinHelp — What is Portability of the Estate Tax Exemption?: https://finhelp.io/glossary/what-is-portability-of-the-estate-tax-exemption/
• FinHelp — Understanding Trusts and Estate Tax Filing Requirements: https://finhelp.io/glossary/understanding-trusts-and-estate-tax-filing-requirements/

Professional disclaimer

This article is educational and not personalized legal, tax, or financial advice. Trust and tax law vary by state and change over time. Consult a qualified estate planning attorney and tax advisor to design and implement trust documents tailored to your circumstances.