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Estate Planning with a Credit Shelter or Bypass Trust


One of the primary reasons behind most estate planning instruments is asset protection through avoidance of Federal Estate Taxes. For larger marital estates that exceed the exempt amount provided by law, an estate planning attorney may draft a Credit Shelter Trust or Bypass Trust that upon death of the first spouse splits into A/B Trusts. If there are children from a previous marriage, a Qualified Terminable Interest Property Trust (QTIP) may be more beneficial.


Upon the death of the first spouse, the Credit Shelter Trust or Bypass Trust splits into sub-trusts A and B.  “Trust A” becomes the Marital Deduction Trust for the benefit of the surviving spouse and “Trust B” holds the assets of the decedent. “Trust A” remains a revocable trust controlled by the surviving spouse. “Trust B” becomes an irrevocable trust controlled by a trustee and is usually earmarked for heirs. As long as “Trust A” and “Trust B” do not exceed the maximum lifetime exemption, there should not be any Federal Estate Tax.

Next, an estate planning attorney will obtain the asset value of the property held in the Credit Shelter Trust or Bypass Trust upon date of death of the first spouse. Upon splitting of the trust, the surviving spouse is entitled to a 50% community property allowance. The surviving spouse will select which assets will remain in the Marital Deduction Trust (“Trust A”). The objective is to have “Trust B” allotted the maximum exempt amount allowed by the American Taxpayer Relief Act of 2012 by taking into consideration appreciation value of the assets held in the trust until the passing of the surviving spouse.

To keep “Trust B” below the threshold of the maximum exempt amount, the trust pays the surviving spouse all income, capital gains, and interest from the property held in “Trust B.”

In addition, “Trust B” may allow a surviving spouse an option to withdraw 5% of the aggregate market value of all property included in the Family Trust not to exceed $5,000 from the principal of the Family Trust each calendar year.


The American Tax Relief Act of 2012 provides the option of the “portability” election of a spouse. Basically, the concept was intended to allow the deceased spouse unused exemption (DSUE) to be transferred to the surviving spouse. On the surface, it sounds like a great answer to a long-time estate planning problem. Unfortunately, it only renders that estate planning is even more essential. For further details on the portability election, review my “Portability Estate Tax Trap” article.

As a result, here are a few ideal reasons that a Creditor Shelter or Bypass Trust is needed:

  • Estate tax free appreciation of the assets allocated to the Trust
  • Asset protection against estate taxes
  • Asset protection against creditors of assets held in the Trust
  • Preserving assets for children of a prior marriage


There are a few ways to avoid the Federal Estate Tax. Each individual is entitled to a lifetime exemption from Federal Estate Tax either during his or her lifetime or upon passing.

Also, an individual may gift up to $14,000 per year per person in 2013. The current tax law 26 U.S.C. Section 2503 – Taxable Gifts, the Gift Tax Calculation allows you to make a gift of $14,000 ($10,000 base plus cost of living adjustment for inflation) or less per person each year without creating a taxable event. In 2014 the Gift Tax Calculation will remain at $14,000. You may gift more each year as long as you either pay a gift tax or file a gift tax return utilizing a portion of your allowed exemption. To learn more about estate tax review my estate planning gift tax blog.


  • Credit Shelter Trust or Bypass Trust that is specifically tailored to your situation
  • Pour-over Will
  • Certification of Trust
  • Advance Health Care Directive
  • Nomination of Guardian if there are minor children
  • Assignment of Tangible Personal Property
  • Preparation and recording of Deed(s) transferring property to trust
  • County change of ownership report

Contact Florida Probate and Trust Litigation Attorney Thomas Upchurch of Upchurch Law for a consultation at (386) 272-7445 or email him at tupchurch@upchurchlaw.comtoday.

Florida Probate and Trust Litigation Attorney Thomas Upchurch serves the entire state of Florida, serving Central and North Florida Areas which include Daytona Beach, Port Orange, Deland,Ormond Beach, Jacksonville, Palm Coast, Orlando, Saint Augustine, and New Smyrna Beach.Areas he serves in South Florida include Miami, Ft. Lauderdale, Coral Springs, and Coral Gables and in West Florida include Tampa and Clearwater Attorney Upchurch may still handle your matter if your city is not listed.

Attorney Thomas Upchurch is also on Facebook. You may like his Facebook page.

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