Understanding the Credit Shelter Trust

A credit shelter trust is a legal entity frequently used to pass wealth on to beneficiaries. This method has some advantages and disadvantages that you should know about before getting involved with it. Here are the basics of the credit shelter trust and how you can use one.

Credit Shelter Trust

This is a type of trust that a married couple can set up in order to eventually distribute assets to their beneficiaries. When the trust is set up, the married couple will determine which assets will go into the control of the trust. The assets will remain in the trust until one of the spouses dies. At that point, the remaining spouse will have access to the funds in the trust. He or she will be able to gain access to the money generated from investments within the trust.


This type of trust has several advantages over other similar types of trusts. One of the biggest advantages that you get by using the credit shelter trust is the ability to get around estate taxes. If you were to try to pass on your estate without the use of this trust, you would potentially have to pay a large amount to the government in estate taxes. By using the credit trust, you can completely avoid this problem and pass a large sum onto your children.

Another big advantage of the credit shelter trust is the ability to change the cost basis of certain assets. For example, let's say that a married couple purchased $50,000 worth of stock 50 years ago. Over the last 50 years, the stock appreciated to $1 million in value. If they wanted to pass this stock onto their children, they would have a few different choices of how to do this. One option would be for them to pass the stock onto the children directly. If they did this, whenever the children sold the stock, they would have to pay capital gains tax on $950,000. The other option that they would have is to put the stock into a credit shelter trust. As soon as they put the stock into the credit shelter trust, the cost basis would jump up to $1 million. When the stock passed onto the children, they would not have to worry about capital gains taxes.


When you use this type of trust, you will have to worry about legal fees and the process of transferring assets into the trust. If you have a sizable estate, this will not be an issue, but it will require some work on your part to get the trust initiated.

Another problem with this type of trust is that you may need to designate a co-trustee. A co-trustee will work with the surviving spouse in order to determine how the assets in the trust will be used. This means that you will need to find someone that you can trust to act as a trustee. Otherwise, your spouse may not be able to gain access to the assets in the trust except for medical expenses.

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