What is a Credit Shelter, Bypass, or A/B Trust, and how does it work?
A Credit Shelter Trust, also known as a Bypass Trust or A/B Trust, is used to reduce or eliminate federal estate taxes for a married couple whose estate exceeds the amount exempt from federal estate tax. For example, in 2008, every individual is entitled to pass the first $2,000,000 of assets (minus any non-exempt lifetime gifts) free of federal estate taxes. This is known as the “applicable exclusion amount”. Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her applicable exclusion amount . However, for individuals with substantial assets, the marital deduction does not eliminate estate taxes but simply works to delay them. This is because when the second spouse dies with an estate worth more than the applicable exclusion amount, his or her estate is then subject to estate tax on the excess. Meanwhile, the opportunity to pass the applicable exclusio
