Exemption Maximizers.
Credit Shelter And Bypass Trusts
Lock in your First Spouse’s Exemption, Shelter Future Growth from Tax, and Keep Assets Protected for Your Family—Without Handcuffing the Survivor.
Credit Shelter and Bypass Trusts in New Jersey
How a Credit Shelter Trust (CST)—also called a Bypass or Family Trust—fits with Revocable Living Trusts, portability (DSUE), QTIP structures, the SECURE Act, and New Jersey realities.
When the first spouse dies, the clock starts on decisions that echo for decades. A Credit Shelter Trust (CST)—also called a Bypass Trust or Family Trust—uses the first spouse’s federal estate tax exemption immediately, then bypasses the survivor’s taxable estate so that all future growth on those assets can pass estate-tax free to children or other beneficiaries. At the same time, the CST can provide the survivor with access for HEMS—Health, Education, Maintenance, and Support—and build in creditor and remarriage protections that outright inheritance simply can’t.
In other words: the CST is your “use it and keep it” bucket. You use the first spouse’s exemption now and keep the pot growing outside the survivor’s estate later. That’s why CSTs remain a cornerstone of sophisticated New Jersey planning—especially for homeowners with appreciated real estate (hello, shore homes), business owners, and families expecting portfolio growth.
What A Credit Shelter Trust Actually Does
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Captures The Exemption: At the first death, we fund a trust—up to the federal exemption amount—with assets from the Revocable Living Trust (RLT) or pour-over Will.
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Shelters All Future Growth: The assets and all appreciation inside the CST are not counted in the survivor’s taxable estate.
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Supports The Survivor: The survivor can receive distributions under HEMS and, with careful drafting, may serve as trustee (often with an independent co-trustee for principal).
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Protects From Creditors & Remarriage Risks: Spendthrift provisions and trustee discretion mean protection you don’t get with outright ownership.
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Coordinates With Portability: We generally still file Form 706 to preserve portability—the DSUE (Deceased Spousal Unused Exclusion)—as a belt-and-suspenders approach.
Why CSTs still Matter in NJ (Even with Portability)
Portability does not shelter growth after the first death; a CST does. In New Jersey, where couples often hold low-basis real estate and concentrated positions, the appreciation between the first and second deaths can be significant. Combine that with our goal of keeping families out of probate (a public, creditor-first process with a realistic 3–7% all-in administrative drag once you add commissions, legal/accounting fees, bond premiums, appraisals, and delays), and the CST’s protection plus privacy make it the default for many estates.
CST, QTIP, Or Both?
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CST Only: Maximizes tax shelter and protection. Best when survivor has other income/assets and the marriage is first-time/long-term.
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QTIP Only: Prioritizes survivor income, defers tax to second death, and lets us manage basis step-up later—but elected QTIP assets do enter the survivor’s estate.
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Hybrid (Our typical Go-To): Fund the CST to a target (tax- and cash-flow–driven), then use QTIP for additional spouse support and post-mortem flexibility. File 706 to secure DSUE. The hybrid gives you shelter and control.
Funding The CST (Trust Funding Is Non-Optional)
We do the heavy lifting so the plan works in real life:
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Real Estate: Bargain & Sale Deeds to your RLT; at first death, allocate to CST or QTIP per the formula.
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Brokerage/Bank Accounts: Retitle to the RLT now; keep clean sub-accounts for traceable allocations later.
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Life Insurance: Often to ILIT (Irrevocable Life Insurance Trust) for outside-estate proceeds; in other cases to spouse/RLT depending on goals.
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Retirement Accounts: Coordinate with an SRT (Stand-Alone Retirement Trust) or survivor outright, mindful of SECURE Act 10-year rules.
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Closely-Held Interests: Track basis, elections, and QSST/ESBT needs for S-corp stock.
A trust without funding is a pretty binder that fails. We quarterback deeds, titles, beneficiaries, and confirmations—and maintain them through AMP (Annual Maintenance Program) or CCP (Continuing Counsel Plan).
NJ-Specific Planning Notes
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Probate Avoidance: Properly funded RLT → CST design minimizes probate exposure in Somerset, Morris, Monmouth, Bergen, and shore counties alike.
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Inheritance Tax Classes: Class A (spouse/lineal) are exempt; remainder beneficiaries who are not Class A (siblings, nieces/nephews, friends) can trigger NJ inheritance tax. We plan beneficiary classes and timing carefully.
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Shore Homes & Rentals: We often house them in the RLT with use provisions for the survivor and remainder for kids, allocating to the CST for protection and growth shelter.
Common Mistakes We Prevent
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Relying On Portability Alone: DSUE doesn’t shelter post-death appreciation.
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Missing The 706 Filing: Even tax-free estates should file to preserve DSUE; “we thought we didn’t need it” is costly.
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Conduit-Only Retirement Language: After the SECURE Act, conduit trusts can force taxable accelerations. We favor accumulation-capable SRTs when protection is a priority.
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Unfunded Trusts: No retitling = no shelter. We fund now and audit annually.
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Over-Broad Spousal Powers: Giving the survivor too much control can undermine protection and tax goals; we balance access with integrity.
FAQs
Q: Won’t portability make the CST obsolete?
A: No. Portability does not shelter growth. The CST does—and adds protection and control.
Q: Can my spouse be trustee of the CST?
A: Often yes, with HEMS limits and an independent co-trustee for principal to preserve protection.
Q: What about our IRAs and 401(k)s?
A: We coordinate beneficiary designations and often deploy an SRT with accumulation provisions to manage the 10-year rule and tax brackets.
Q: Do CST assets lose step-up at the second death?
A: Generally, yes—no second step-up. We weigh that basis trade-off against the estate-tax savings and protection, and we can blend with QTIP where basis is paramount.
Q: What happens if we don’t fund the RLT now?
A: The plan risks probate exposure and missed shelter. We retitle now and keep it current through AMP/CCP.
Book A Strategy Call
Book A Strategy Call to see your CST numbers—how much to shelter, how much to support the survivor, and how to title every asset now so the plan works later. We’ll design it, fund it, and keep it maintained.