Credit shelter trusts: Definition, purpose & strategies to reduce estate tax

Imagine a married couple who spent decades saving, investing wisely, building wealth and hoping to leave something meaningful for their children and grandchildren. Yet, as they begin to plan their legacy, they realize a big chunk of their assets could go toward estate taxes.

That’s where a credit shelter trust comes in. This estate planning tool helps families protect assets, minimize tax exposure and transfer wealth according to their legacy goals.

In this article, we explain what a credit shelter trust is, how it works and how it can fit into a thoughtful, tax-efficient legacy plan.

A credit shelter trust—also called a bypass or family trust—is an irrevocable trust that helps married couples minimize estate taxes and fully use their federal estate tax exemption, the threshold for passing wealth without federal estate tax.

No matter when the credit shelter trust is established, it doesn't take effect until one spouse dies. At that time, part of the deceased spouse's assets, up to the exemption limit, are transferred into the trust instead of to the surviving spouse. The surviving spouse can still benefit from the trust’s income and, in some cases, access the principal. 

To explain how a credit shelter trust works, let’s look at an example of a couple that doesn’t have one. Lewis and Nicolette have $10 million in assets. Lewis dies in 2026, when the federal estate tax exemption is $15 million. Because Lewis’ share of the estate is less than the exemption amount, no federal estate tax is due. His share of the estate simply passes to Nicolette, the surviving spouse.

Nicolette’s investments perform well, and she receives a sizable inheritance from another family member over the next several months. She later passes away in 2026, with an estate worth $20 million—well over the $15 million exemption amount. As a result, her executor must pay estate taxes before distributing assets to Nicolette’s heirs.

If Lewis and Nicolette had a credit shelter trust, when Lewis died, his share of their assets ($5 million) would have gone into the trust at that time. That would mean Nicolette’s estate would be worth $15 million at her death, so it would not be subject to estate taxes.

The primary reason to use a credit shelter trust is to minimize or avoid estate taxes. For high-net-worth families, estate taxes can significantly lower the amount available to pass on to heirs. A credit shelter trust helps both spouses fully use their individual federal estate tax exemptions, potentially doubling the amount of wealth they can transfer to the next generation tax-free.

Beyond tax advantages, credit shelter trusts provide additional benefits such as asset protection and control over wealth distribution. Assets placed in the trust are protected from creditors and can’t be diverted if the surviving spouse remarries. This gives families reassurance knowing their wealth will ultimately go to their intended heirs, such as children or grandchildren.

A credit shelter trust isn’t just about taxes—it can also help you protect what you’ve built for the next generation. For some families, it’s a smart way to take care of a surviving spouse while still making sure the rest of the plan stays aligned with their long-term wishes.

Here’s how a credit shelter trust typically works from the time it’s established through the transfer of assets to beneficiaries:

A married couple can create a credit shelter trust while both spouses are alive, or they can include instructions for one to be created at death through a will or living trust. If the trust is created during life, its terms usually can be changed until the first spouse dies.

Once the first spouse dies, the trust becomes irrevocable, meaning the provisions for the trust can no longer be altered. Assets up to the federal estate tax exemption amount ($15 million per person in 2026) are transferred into the credit shelter trust. Those assets are outside of the surviving spouse’s taxable estate.

The surviving spouse can draw income from the trust and, in some cases, obtain access to limited amounts of principal for specific needs like health care or living expenses.

When the surviving spouse passes away, the assets in the credit shelter trust aren’t included in his or her taxable estate, so they pass directly to the beneficiaries without incurring estate taxes.

Couples often compare credit shelter trusts to two other tools during their estate planning: portability and marital trusts. Each approach helps preserve assets and reduce estate tax exposure, but they work differently. The right choice depends on your goals, the size of your estate and your family situation.

Portability allows a surviving spouse to use any unused federal estate tax exemption from the deceased spouse’s estate. A marital trust, also known as a spousal trust, provides income to the surviving spouse while ensuring the remaining assets later pass to designated heirs.

Here’s a closer look at how they compare to a credit shelter trust.

Credit shelter trusts are generally most useful for couples with estates large enough to trigger estate tax exposure. Portability offers a simpler path for moderate estates, while marital trusts provide greater control and protection in blended or complex family situations.

A credit shelter trust is most effective for high-net-worth couples with taxable estates that exceed the federal exemption limits. It’s especially valuable for families who want to minimize estate taxes and preserve wealth for future generations.

Credit shelter trusts tend to be most useful in situations such as:

• Living in a state with estate or inheritance taxes: Couples may use a credit shelter trust to help reduce both federal and state-level estate tax exposure.
• Owning a business or rapidly appreciating assets: Real estate, closely held businesses and investments can “lock in” current values so future growth is sheltered from taxation.
• Needing added structure or protection: When there are asset-protection concerns, blended family dynamics or the possibility of remarriage, the trust can provide more control over how and when assets are ultimately distributed.

You can also pair credit shelter trusts with other tools, such as marital trusts, lifetime gifting strategies or irrevocable life insurance trusts to form a comprehensive, tax-efficient estate plan. Working with a financial advisor and an estate planning attorney ensures your plan is customized and coordinated to support your long-term legacy goals.

A credit shelter trust is a powerful tool for protecting what you’ve built and passing it on with purpose, ensuring your wealth supports future generations and reflects your values. Minimizing estate tax exposure, shielding assets and ensuring your legacy reaches future generations as intended helps you turn financial success into lasting impact.

Every family’s situation is unique, and your estate plan should reflect that. If you’re wondering whether a credit shelter trust fits your goals, connect with a Thrivent financial advisor or explore our Trust Services.