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Executor, trustee, guardian, POA agent, healthcare proxy, and backups are often the hardest planning decisions.
The CST shelters more than the federal exclusion — it shelters every dollar of growth between two deaths.
Credit Shelter Trusts (also called bypass or B trusts) fund at the first spouse's death with assets up to the deceased spouse's remaining federal estate-tax exclusion. The trust assets bypass the surviving spouse's estate at the second death — so the original principal plus all post-death appreciation passes to the next generation free of federal estate tax.
What we do. Formula-funded Credit Shelter Trusts and disclaimer-trust variants; CST drafting integrated with revocable-trust and pour-over-will structures; surviving-spouse trustee structures balancing access and bypass; GST allocation; coordination with QTIP trusts for blended-family and HNW couples; CST trust administration after the first spouse's death.
How we work. Statewide across all 21 NJ counties. CST planning is part of broader estate-plan design — we typically scope CSTs as components of a full estate-planning engagement rather than as standalone documents.
The conversations that lead to CST planning have a few recognizable shapes. The couple in their late 50s whose business sale is closing this year and whose post-sale net worth will sit at $25 million. The blended-family situation where the husband's first-marriage children and the second wife do not see eye-to-eye, and the plan needs to be structured so the second wife is provided for during her lifetime but the children inherit at the second death. The couple worried about future changes to the federal exclusion and wanting to lock in a resilient planning architecture. The retirees managing a $10 million estate today who expect substantial appreciation if their investment posture holds another 20 years.
The Credit Shelter Trust is the planning tool designed for these situations. It is not the answer for every married couple — the simpler portability election under IRC § 2010(c)source is adequate for many — but where appreciation, blended-family control, GST allocation, or creditor exposure matters, the CST remains a powerful federal-estate-tax planning structure.
How the CST funds — and why timing matters.
A CST funds at the first spouse's death. The will or revocable trust contains a formula directing that assets up to the deceased spouse's remaining federal estate-tax exclusion (the federal applicable exclusion amount under IRC § 2010(c)source, currently $15M per individual in 2026 subject to annual indexing) pass to the trust rather than to the surviving spouse outright. The remainder — assets above the deceased spouse's exclusion — typically pass to the surviving spouse outright or to a QTIP trust (see QTIP trusts).
The formula matters. The most common formulations are: pecuniary (a fixed dollar amount equal to the exclusion) and fractional (a fraction of the residuary calibrated to fund up to the exclusion). Each has tax and administration implications — the pecuniary formula causes the trust to take fixed-basis assets and may produce income recognition on appreciated assets used to fund; the fractional formula causes the trust to take a proportional slice of the residuary, with no funding-gain recognition but more complex accounting. We model both approaches at the planning stage and select based on the family's asset mix and likely changes in value between drafting and death.
Why it's called 'bypass' — and what bypasses.
The 'bypass' label captures the structural feature: CST assets bypass the surviving spouse's taxable estate. At the surviving spouse's death, the CST is not includable in the surviving spouse's gross estate for federal estate tax purposes — so the CST's principal value, plus all appreciation during the surviving spouse's lifetime, passes to the remainder beneficiaries free of federal estate tax. The 'bypass' contrast is to assets that pass to the surviving spouse outright (or via a QTIP, which is includable at the second death) — those assets are subject to the surviving spouse's estate tax at the second death if they exceed the surviving spouse's exclusion.
The bypass is the planning advantage. A CST funded at $15M today (the 2026 federal exclusion) that doubles to $30M by the surviving spouse's death in 25 years passes the full $30M to the children free of federal estate tax. The same $15M passed outright to the surviving spouse, allowed to grow to $30M, would face federal estate tax on $15M of it (the amount over the surviving spouse's exclusion, assuming the surviving spouse used the DSUE via portability). At a 40% federal estate tax rate, the appreciation shelter saves $6M.
CST vs. portability — when each one fits.
The portability election under IRC § 2010(c)source — made permanent by the American Taxpayer Relief Act of 2012 — allows the surviving spouse to claim the deceased spouse's unused federal estate-tax exclusion (the deceased spousal unused exclusion, or DSUE). The election is made by filing Form 706 at the first death, even where no tax is owed. The DSUE then combines with the surviving spouse's own exclusion at the second death.
Portability is simpler than a CST and adequate for many couples. The differences matter, though, in specific situations:
- Appreciation shelter. Portability locks the DSUE at the first-death amount. The CST shelters all post-first-death appreciation. For couples with substantial remaining lifetime and rapidly appreciating assets, the CST is meaningfully better.
- GST allocation. The deceased spouse's GST exemption is not portable. A CST allows allocation of the deceased spouse's GST exemption to the trust, sheltering future generations.
- Blended-family control. The CST fixes the remainder beneficiaries at the first death. Portability requires the surviving spouse to maintain the disposition through their own estate plan, with no enforcement mechanism.
- Creditor and remarriage protection. CST assets are not the surviving spouse's property. Portability assets pass to the surviving spouse outright and are exposed to their creditors and any future spouse.
- Administration. Portability requires a Form 706 at the first death even where no tax is owed; that filing has its own costs and deadlines. A CST carries its own administration — a separate trust to fund, account for, and file returns on — but in exchange it delivers the appreciation shelter, asset protection, and GST and remainder control that portability cannot. The choice is rarely about avoiding work; it is about which work buys the protection the family actually needs.
We model both approaches at the planning stage and select based on the couple's specific risk profile.
Surviving-spouse access — HEMS, the 5-or-5 power, and trustee structure.
The CST is designed to provide the surviving spouse with meaningful lifetime access while preserving the bypass. The standard tools:
- All trust income. The surviving spouse receives all of the CST's net income for life. This is mandatory in most CST drafting to preserve trust character and provide lifetime support.
- HEMS principal access. The trustee may distribute principal to the surviving spouse for health, education, maintenance, and support — the 'ascertainable standard' under IRC § 2041(b)(1)(A)source. HEMS distributions are protected from inclusion in the surviving spouse's estate even if the surviving spouse is also a trustee.
- The 5-or-5 power. Under IRC § 2041(b)(2)source, the surviving spouse may have an annual right to withdraw the greater of $5,000 or 5% of the trust principal — exercisable each year without inclusion in the surviving spouse's estate. Over time, this provides meaningful access without compromising bypass.
- Trustee structure. Independent trustee, co-trustee with the surviving spouse, or surviving spouse as sole trustee — each option calibrates access vs. control. Sole-trustee structures require careful drafting to avoid general powers of appointment that would defeat bypass.
The disclaimer-trust variant — flexibility at the cost of certainty.
The disclaimer-trust variant approaches the CST goal differently. The will leaves everything outright to the surviving spouse. The surviving spouse then has nine months under IRC § 2518source to execute a qualified disclaimer — refusing to accept a designated portion of the inheritance. Disclaimed assets pass into a trust pre-designed in the will, with CST-like terms.
The variant adds post-death flexibility — the surviving spouse can assess the actual federal exclusion, actual asset values, and the surviving spouse's needs before deciding whether and how much to disclaim. In years where the exclusion has grown or asset values have fallen, no disclaimer is needed and everything passes outright. In years where CST funding makes sense, the disclaimer activates the trust.
The tradeoffs: (1) The surviving spouse must actively decide within the 9-month window — and decisions made in grief at a complicated moment can be wrong. (2) The deceased spouse loses control over whether bypass funding actually happens. (3) GST allocation requires Form 706 procedural steps to complete. Disclaimer trusts work well when the couple expects to be near the exclusion threshold rather than far above it; formula-funded CSTs are more reliable when wealth substantially exceeds the federal exclusion.
New Jersey's estate-tax repeal — and what still applies.
New Jersey repealed its state estate tax effective January 1, 2018 (under L. 2016, c. 57). Before the repeal, NJ imposed estate tax on amounts above $675,000 (later $2M), substantially below the federal exclusion — meaning CST planning had a meaningful NJ component for moderate estates. The repeal eliminated that state-level driver. Today, CST planning in New Jersey is federal estate-tax planning, with no offsetting NJ estate-tax shelter.
NJ inheritance tax under N.J.S.A. 54:34source remains. Inheritance tax applies based on the relationship between the decedent and the beneficiary: Class A beneficiaries (spouse, civil-union partner, lineal descendants, lineal ancestors, stepchildren) pay no inheritance tax; Class C and D beneficiaries pay graduated rates from 11% to 16%. CSTs typically pass income to the spouse (Class A) and remainder to children (Class A) — so the CST doesn't usually drive NJ inheritance tax outcomes. Where remainder beneficiaries include Class C or D beneficiaries (siblings, nieces/nephews, friends, unrelated beneficiaries), the NJ inheritance tax can be relevant and is modeled at planning.
CST + QTIP — the blended-family workhorse.
The CST-plus-QTIP combination is the most useful structure in blended-family and HNW estate planning. Step 1: the deceased spouse's federal exclusion funds a CST with deceased-spouse-fixed remainder beneficiaries (typically children of the deceased spouse). Step 2: assets above the deceased spouse's exclusion fund a QTIP trust under IRC § 2056(b)(7)source, qualifying for the unlimited marital deduction at the first death. The surviving spouse receives all QTIP income for life; the remainder is fixed by the deceased spouse.
The combination delivers full federal estate-tax efficiency at both deaths, deceased-spouse-fixed remainder beneficiaries for both trusts (preventing redirection by the surviving spouse to a new family), and surviving-spouse lifetime support from both trusts. The reverse-QTIP election under IRC § 2652(a)(3)source preserves the deceased spouse's GST exemption allocation for the QTIP. The CST + QTIP structure is the standard answer for second-marriage couples where the deceased spouse wants to provide for the surviving spouse but ensure the children of the prior marriage actually inherit at the second death. See our QTIP trusts page for the QTIP side of the structure.
Where CST planning starts.
A Credit Shelter Trust is not a document you buy off the shelf; it is a decision reached after looking at the whole picture. The first question is rarely "CST or not" — it is what the combined estate is likely to be worth at each death, how fast the assets are expected to grow, whether this is a first or a later marriage, who should ultimately inherit, and how much creditor or remarriage exposure the surviving spouse may face. Those answers decide whether portability is enough, whether a formula-funded CST earns its keep, or whether a disclaimer trust leaves the right amount of room to decide later. We work those questions through before any trust language is drafted, and we revisit the plan when the federal exclusion or the family's circumstances change.
The most useful first step is a conversation about your numbers and your intentions. From there we can tell you, in plain terms, which structure fits and why — or whether the simpler path is the right one for you.
Call (800) 709-1131 to schedule a consultation request, or get started online with our estate-planning questionnaire.
Frequently asked questions
What is a Credit Shelter Trust — and why is it also called a 'bypass' or 'B trust'?
A Credit Shelter Trust (CST) is an irrevocable trust funded at the first spouse's death with assets up to that spouse's remaining federal estate-tax exclusion. The surviving spouse receives lifetime income and limited principal access, but the trust assets bypass the surviving spouse's estate at the second death — sheltering them from federal estate tax even as they appreciate.
The Credit Shelter Trust is the original federal-estate-tax planning vehicle for married couples. The mechanics: at the first spouse's death, the will or revocable trust directs that assets equal to the deceased spouse's remaining federal estate-tax exclusion ($15 million per individual in 2026, subject to annual indexing) fund the CST instead of passing outright to the surviving spouse. Because those assets pass to the CST rather than to the surviving spouse, they don't qualify for the unlimited marital deduction under IRC § 2056(a) — but the deceased spouse's exclusion shelters them from estate tax. The surviving spouse can be the income beneficiary of the CST during their lifetime and can receive principal distributions under an ascertainable standard (typically health, education, maintenance, and support — HEMS), and may even hold a limited power to invade principal (the 5-or-5 power). But the CST assets generally are not in the surviving spouse's taxable estate at the second death — meaning they can pass to the children or other remainder beneficiaries outside the surviving spouse's estate. Critically, appreciation in the CST assets between the two deaths can also avoid federal estate tax in the surviving spouse's estate: a $15M CST that grows to $30M may still pass to the next generation without second-spouse estate inclusion. That growth-shelter is the central planning advantage of CSTs over the simpler portability alternative — and it remains true even as portability has reduced the need for CSTs in many simpler estates.
Now that portability exists, do we still need a CST?
Sometimes yes, sometimes no — and the answer depends on expected asset appreciation, remarriage risk, GST-tax planning, and creditor exposure. Portability is simpler and adequate for many couples; CSTs remain meaningfully better in specific situations.
The portability election under IRC § 2010(c), made permanent in 2012, allows the surviving spouse to claim the deceased spouse's unused federal estate-tax exclusion (DSUE) by filing a federal estate tax return (Form 706) at the first death — even where no estate tax is owed. For many couples, portability achieves the same federal estate-tax result as a CST without the trust administration complexity. The CST retains real advantages, however, in specific situations: (1) Appreciation shelter. Assets in a CST escape federal estate tax on appreciation between the first and second deaths; portability locks in the DSUE at the first death's dollar amount without future-growth shelter. For couples with significant remaining lifetime ahead and rapidly appreciating assets, the appreciation shelter alone can justify the CST. (2) Generation-skipping transfer (GST) tax allocation. The deceased spouse's GST exemption is not portable. A CST allows the deceased spouse to allocate GST exemption to the trust, sheltering future generations from the GST tax. (3) Blended-family control. The CST allows the deceased spouse to fix the remainder beneficiaries — typically children of the deceased spouse — without depending on the surviving spouse to maintain that disposition. (4) Creditor and divorce protection for the surviving spouse. CST assets are not the surviving spouse's property and are not reachable by their creditors or in a future divorce. (5) Remarriage risk. If the surviving spouse remarries, the new spouse cannot claim the CST assets in any future estate or matrimonial proceeding. We model both approaches at the planning stage and select based on the couple's specific risk profile.
Who controls the CST — and what can the surviving spouse actually do with it?
An independent trustee — or a co-trustee structure with the surviving spouse as one of multiple trustees — controls the CST. The surviving spouse typically receives all income, can receive principal under an ascertainable standard (HEMS), and may hold a limited '5-or-5 power' over a fixed portion of principal each year.
CST trustee selection determines how much practical access the surviving spouse has. The most common structures: (1) Independent trustee. A corporate trustee (bank trust department, professional trust company) or a qualified individual trustee not closely related to the surviving spouse. Maximizes the bypass-from-estate result and the asset-protection benefit, but reduces the surviving spouse's day-to-day control. (2) Surviving spouse as co-trustee with an independent co-trustee. Common compromise — the surviving spouse has input on investment and distribution decisions, but the independent co-trustee has independent fiduciary authority. Distributions to the surviving spouse must be from the independent trustee's authority (or under an ascertainable HEMS standard) to maintain bypass status. (3) Surviving spouse as sole trustee. Permissible but limits the surviving spouse's powers to distributions under an ascertainable standard (HEMS) and prohibits any general power of appointment, because a general power of appointment would ordinarily cause the assets to be included in the surviving spouse's taxable estate at death under IRC § 2041 and defeat the bypass. The surviving spouse's permitted access typically includes: all trust income for life (mandatory in most CSTs); principal distributions for HEMS purposes; and a limited 5-or-5 power (the right to withdraw the greater of $5,000 or 5% of trust principal annually, without inclusion in the surviving spouse's estate, under IRC § 2041(b)(2)). The structure is calibrated to balance the surviving spouse's lifetime access against the bypass and asset-protection goals.
How does the disclaimer-trust variant work — and when is it the better choice?
A disclaimer trust funds based on the surviving spouse's post-death decision rather than a pre-set formula. The will leaves everything to the surviving spouse, who then has nine months to disclaim some portion — disclaimed assets fall into a CST-like trust. The variant adds post-death flexibility at the cost of relying on the surviving spouse's decision.
The disclaimer-trust variant approaches the CST goal from a different procedural angle. Rather than directing at death that a specific dollar amount fund the CST, the will leaves everything outright to the surviving spouse. The surviving spouse then has nine months under IRC § 2518 to execute a qualified disclaimer — refusing to accept a designated portion of the inheritance. Assets disclaimed pass into a trust pre-designed in the will, with terms mirroring a CST (income to surviving spouse for life, ascertainable principal access, remainder to children). The advantages: post-death flexibility. The surviving spouse can assess the actual size of the federal exclusion at the time of death (it changes annually), the actual asset values, the surviving spouse's own remaining lifetime needs, and the children's circumstances before deciding how much (if any) to disclaim. In years where the federal exclusion is higher than expected or assets are lower, the surviving spouse can take everything outright with no need for CST funding. In years where the situation calls for CST funding, the disclaimer activates the trust. The disadvantages: (1) Decision risk. The surviving spouse must actively decide to disclaim — and disclaimer decisions made in grief at the wrong window can be irrevocable. (2) Surviving-spouse-driven. The deceased spouse loses control over whether the bypass funding actually happens. (3) GST allocation requires Form 706 reverse-QTIP-style election timing. Disclaimer trusts work well when the couple is comfortable with the surviving spouse making the funding decision and when the couple expects to be near the exclusion threshold rather than far above it. Where the family wealth substantially exceeds the federal exclusion, a formula-funded CST is more reliable.
Does New Jersey's repealed estate tax change anything for CST planning?
Yes — significantly. New Jersey's estate tax was repealed effective January 1, 2018, meaning CST planning in NJ now focuses solely on the federal estate tax. NJ inheritance tax remains and affects beneficiary class distinctions, but the CST itself doesn't usually drive NJ inheritance tax outcomes.
Before 2018, New Jersey imposed a state estate tax with a $675,000 exclusion (later $2M) that was substantially below the federal exclusion. NJ residents with estates between the NJ exclusion and the federal exclusion faced a state-only estate-tax exposure that CST planning addressed. The repeal of the NJ estate tax effective January 1, 2018 (under L. 2016, c. 57) eliminated that state-level driver. Today, CST planning in New Jersey is essentially federal-estate-tax planning — the trust shelters assets from the federal estate tax with no offsetting NJ estate-tax savings. The federal exclusion is $15M per individual for 2026, subject to indexing after 2026, meaning most NJ couples with combined wealth below $30M no longer have federal estate-tax exposure under current law. CSTs still provide appreciation shelter, creditor protection, GST planning, blended-family control, and resilience against future legislative change. NJ inheritance tax under N.J.S.A. 54:34source continues to apply based on the relationship between the decedent and the beneficiary (Class A — spouse, children, parents — pays no inheritance tax; Classes C and D pay graduated rates). CSTs typically pass to spouse (Class A) for income and children (Class A) for remainder — so the CST doesn't usually drive NJ inheritance tax outcomes. We model the federal estate tax projection at planning and revisit it on legislative changes.
How does a CST coordinate with a QTIP trust?
In blended families and HNW planning, CSTs and QTIPs are often paired: the deceased spouse's exclusion funds the CST (bypassing the surviving spouse's estate), and additional assets fund a QTIP for the surviving spouse's lifetime support with remainder fixed for children of the prior marriage. Together they balance tax efficiency with control.
The CST-and-QTIP combination is one of the most useful structures in blended-family and high-net-worth planning. Step 1: the deceased spouse's remaining federal exclusion funds a CST. The surviving spouse receives lifetime income and HEMS principal access; the assets are not in the surviving spouse's taxable estate at the second death; remainder passes to designated beneficiaries (typically children of the deceased spouse). Step 2: assets above the deceased spouse's exclusion fund a QTIP trust under IRC § 2056(b)(7). The QTIP qualifies for the unlimited marital deduction — meaning no estate tax at the first death — because the surviving spouse receives all income for life. The remainder of the QTIP is fixed by the deceased spouse (again typically children of a prior marriage). At the second death, QTIP assets are included in the surviving spouse's taxable estate (the marital deduction was effectively a deferral, not a permanent exclusion), but the deceased spouse's GST allocation can be made to the QTIP via the reverse-QTIP election under IRC § 2652(a)(3) to preserve GST exemption. The combination accomplishes: full federal estate-tax efficiency at both deaths; deceased-spouse-fixed remainder beneficiaries for both trusts (no risk of the surviving spouse redirecting assets to a new spouse or new family); surviving-spouse lifetime support from both trusts; and GST-tax planning across both trusts. The CST-and-QTIP structure is particularly valuable in second-marriage situations where the deceased spouse wants to provide for the surviving spouse but ensure the children from the prior marriage actually inherit at the second death.
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Reviewed by Britt J. Simon, Esq., Managing Partner, Simon Law Group, LLC — May 2026
Related Practice Areas
Estate Planning — Pillar
Estate planning overview including foundational documents, trusts, and tax planning.
Learn MoreQTIP Trusts
Qualified Terminable Interest Property trusts — marital deduction with deceased-spouse-fixed remainder. Often paired with CST.
Learn MoreIrrevocable Trusts
The full irrevocable-trust framework including CST, ILIT, SLAT, IDGT, and GRAT.
Learn MorePortability
The portability election as the simpler alternative to CST planning.
Learn MoreGeographic scope
Serving 21 New Jersey counties.
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