By John F. Davenport, Esq. | Davenport & Associates, Norwalk, CT | April 13, 2026
If your estate plan was written before 2018, there is a good chance it contains a provision that was once considered essential but is now, for most families, doing more harm than good. It is called a credit shelter trust, sometimes referred to as an AB trust or bypass trust. And if you do not address it before the first spouse passes away, it becomes irrevocable. That means it cannot be changed, and the problems it creates follow your family for decades.
I see this constantly in my practice. A couple comes in with a trust that was drafted 15 or 20 years ago. They did everything right at the time. Their attorney set up an AB trust structure to preserve both spouses’ estate tax exemptions. It was smart planning under the old rules. But the rules have changed dramatically, and what was once a tax-saving tool has become, for many families, a source of unnecessary complexity, higher taxes, and real financial harm.
As both a licensed attorney and a financial advisor, I sit at the intersection of estate planning and tax strategy. I can tell you from experience that the credit shelter trust issue is one of the most common, and most costly, problems hiding in estate plans across the country right now.
To understand why these trusts are now problematic, you need to understand why they were created in the first place.
Before 2011, when the first spouse died, their federal estate tax exemption died with them. If all assets passed outright to the surviving spouse, the deceased spouse’s exemption was wasted. When the surviving spouse eventually passed away, the entire estate was measured against only one exemption. For families with any significant assets, this could mean hundreds of thousands of dollars in estate taxes.
The credit shelter trust solved this problem by splitting the couple’s trust into two parts upon the first death. Trust A (the survivor’s trust) held the surviving spouse’s share and remained fully revocable. Trust B (the credit shelter or bypass trust) held the deceased spouse’s share up to the exemption amount. Trust B became irrevocable, locked in the deceased spouse’s exemption, and kept those assets out of the surviving spouse’s taxable estate.
When exemptions were as low as $600,000, this structure was critical. Even when the exemption rose to $1 million, $2 million, or $3.5 million, the AB trust remained the standard of care in estate planning. Every competent estate attorney recommended it.
| The Key Point The credit shelter trust was designed for a world where estate tax exemptions were low and could not be transferred between spouses. Neither of those things is true anymore. |
Two major changes in federal law made the credit shelter trust unnecessary for the vast majority of married couples.
Starting in 2011, federal law introduced the concept of portability. This means that when the first spouse dies, any unused portion of their estate tax exemption can be transferred to the surviving spouse. The surviving spouse simply files an estate tax return (IRS Form 706) to claim the unused exemption. No trust required.
Portability eliminated the core reason the credit shelter trust existed. A married couple can now protect both spouses’ full exemptions without splitting their trust into subtrusts.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently set the federal estate tax exemption at $15 million per individual, or $30 million for married couples, starting January 1, 2026. The exemption will be indexed for inflation beginning in 2027.
This means that a married couple can pass $30 million to their heirs without owing a single dollar in federal estate tax. For the overwhelming majority of American families, federal estate tax is no longer a concern.
| Not Sure If Your Estate Plan Is Outdated? John F. Davenport, Esq. is both a licensed attorney and financial advisor who reviews estate plans through the lens of current tax law and your overall financial picture. Free 30-minute consultation. -> Schedule a Free Estate Plan Review -> jdavenportassociates.com/contact-us |
If your trust still contains AB provisions and you have not updated it, here is what your family is facing.
This is the single biggest cost of an outdated credit shelter trust, and most families do not realize it until it is too late.
When someone dies, their assets receive a step-up in basis to fair market value. This means the capital gains that accumulated during their lifetime are essentially erased for tax purposes. If a couple bought a house for $200,000 and it is worth $800,000 when the first spouse dies, the basis steps up to $800,000.
Here is the problem: assets placed into the credit shelter trust at the first spouse’s death do not receive a second step-up when the surviving spouse dies. They are frozen at the value from the first death. If that house appreciates to $1.2 million by the time the surviving spouse passes, the heirs inherit it with a basis of $800,000 and face $400,000 in taxable capital gains.
Without the credit shelter trust, the house would remain in the surviving spouse’s estate, receive a full step-up at the second death, and the heirs would inherit it at $1.2 million with zero capital gains. The tax savings can easily be in the tens or hundreds of thousands of dollars, especially for families with appreciated real estate, stocks, or business interests.
| Real-World Example A couple in Fairfield County, CT bought their home in 1998 for $350,000. The home is now worth $1.1 million. If the first spouse dies and the home goes into a credit shelter trust at a $1.1 million basis, but the home appreciates to $1.4 million by the second death, the heirs face $300,000 in capital gains. At a combined federal and state rate of roughly 28 percent, that is approximately $84,000 in taxes that could have been completely avoided. |
When the credit shelter trust is triggered at the first death, the surviving spouse must divide assets between the two subtrusts, maintain separate accounting for each, file a separate tax return for the irrevocable trust every year, and comply with fiduciary duties that may require hiring an attorney and CPA annually. This adds cost, complexity, and stress at exactly the worst time.
Assets in the credit shelter trust are no longer under the surviving spouse’s full control. Distribution rules, investment decisions, and beneficiary changes may all be restricted by the terms of the irrevocable trust. Many surviving spouses find these limitations frustrating, especially when their needs or circumstances change.
Irrevocable trusts hit the highest federal income tax bracket at a very low threshold, just $15,200 in taxable income for 2026. An individual does not reach that same 37 percent bracket until their income exceeds $626,350. This means investment income earned inside the credit shelter trust may be taxed at significantly higher rates than if the surviving spouse owned the assets outright.
With a $30 million combined exemption and portability, the vast majority of married couples will never owe federal estate tax. Maintaining a credit shelter trust to protect against an estate tax that will never apply is like paying for an insurance policy on a house you no longer own.
If you live in New York or Connecticut, there is an additional layer to consider. New York has its own estate tax with a much lower exemption: $7,350,000 per person in 2026. And New York does not recognize portability. If the first spouse dies and their exemption is not properly preserved, it is lost.
New York also has an estate tax cliff. If your estate exceeds 105 percent of the exemption (approximately $7,717,500 in 2026), you lose the entire exemption and pay tax on the full estate. A modest amount of appreciation can push a family over that edge.
For families in the $5 million to $10 million range, the interplay between the federal exemption, the New York exemption, and the credit shelter trust requires careful analysis. In some cases, a modified version of the credit shelter trust may still make sense for state tax purposes. In many cases, better alternatives exist. The point is that the plan written 15 years ago almost certainly does not account for today’s numbers.
The credit shelter trust is not obsolete in every situation. There are specific circumstances where it may still be the right tool.
If the couple’s combined estate significantly exceeds $30 million, the credit shelter trust can still reduce federal estate tax exposure. For blended families where one or both spouses have children from prior relationships, the trust can protect the deceased spouse’s share for their children. For families concerned about creditor protection for the surviving spouse, the irrevocable nature of the trust can provide a layer of asset protection. And in cases involving state estate taxes with no portability (like New York), a properly designed trust can preserve both spouses’ state-level exemptions.
The key word is properly designed. A trust drafted in 2005 to address a $2 million exemption is not the same as one designed today for a $15 million exemption.
If your estate plan was written before 2018 and your combined estate is below $15 million, you should have your trust reviewed immediately. Specifically, look for references to a credit shelter trust, bypass trust, AB trust, or any language describing an automatic split into subtrusts at the first death.
If those provisions are there, the fix is usually straightforward. While both spouses are alive and mentally competent, the trust can be amended to remove or make optional the AB provisions. This can be replaced with a simpler structure that relies on portability and preserves the full step-up in basis.
Once the first spouse dies, the window closes. The credit shelter trust becomes irrevocable, and the problems described above become locked in. Acting now costs a fraction of what inaction costs later.
These are the questions I hear most consistently from families reviewing their estate plans.
| Q: What is a credit shelter trust? It is an irrevocable subtrust created when the first spouse dies. It was designed to preserve the deceased spouse’s estate tax exemption by holding assets outside the surviving spouse’s taxable estate. It is also called an AB trust, bypass trust, or B trust. |
| Q: Do I still need one in 2026? For most married couples, no. Federal portability allows the surviving spouse to claim the unused exemption without a trust. With the combined exemption at $30 million, most families face no federal estate tax at all. Families with estates between $7 million and $15 million in New York may need modified planning for state tax purposes. |
| Q: Can I remove the AB provisions from my existing trust? Yes, but only while both spouses are alive and have legal capacity. Once the first spouse passes away, the credit shelter trust becomes irrevocable and generally cannot be changed. This is why acting before that event is critical. |
| Q: Will removing the credit shelter trust expose me to estate tax?For the vast majority of families, no. With a $15 million per person exemption and portability, most estates are fully protected without a credit shelter trust. For estates above state tax thresholds, alternative strategies can provide protection without the downsides of the old AB structure. |
| Q: How do I know if my trust has these provisions? Look for terms like credit shelter trust, bypass trust, family trust, Trust B, or language describing an automatic division of assets at the first death. The most reliable way to know is to have your trust reviewed by an experienced estate planning attorney. |
| Q: What is the New York estate tax cliff? If your New York taxable estate exceeds 105 percent of the state exemption ($7,717,500 in 2026), you lose the entire exemption and owe tax on the full estate. This means going even slightly over the threshold can cost your family hundreds of thousands in state estate taxes. New York also does not allow portability between spouses, making careful trust planning essential for families above the $7.35 million mark. |
The credit shelter trust was brilliant planning for its time. But tax law has changed fundamentally, and an estate plan written before 2018 is almost certainly operating under assumptions that no longer hold. The cost of inaction is real: lost step-up in basis, higher taxes, unnecessary complexity, and reduced flexibility for the surviving spouse.
If you have not reviewed your estate plan in the last five years, now is the time. The fix is straightforward while both spouses are alive. After the first death, the options narrow dramatically.
| Questions About Your Trust or Estate Plan? Book a free 30-minute call with John Davenport, Esq. He reviews estate plans as both a licensed attorney and financial advisor, helping CT and NY families identify outdated provisions, fix step-up in basis problems, and modernize their trust for today’s tax landscape. -> Schedule Your Free Review -> jdavenportassociates.com/contact-us |
| About the Author | John F. Davenport, Esq. John F. Davenport holds a law degree from Pace University, an MBA in finance from Fordham University and undergraduate degree from the University of Notre Dame. He is a licensed attorney in New York and Connecticut, and a financial advisor. He founded Davenport & Associates in 1997 and has spent more than 30 years helping CT and NY locally and families across the country build retirement income plans and estate strategies that work together, not against each other. Davenport & Associates is located at 800 Connecticut Avenue, Suite E401, Norwalk, CT 06854. Phone: (203) 853-6300 | jdavenportassociates.com IMPORTANT DISCLAIMER: Educational only—not investment/tax/legal advice. No strategy guarantees results—vary by rates, markets, laws, personal circumstances. Consult advisors. |
| References & Sources IRS: Estate Tax Exemption for 2026, $15,000,000 per individual (irs.gov) One Big Beautiful Bill Act (OBBBA), signed July 4, 2025 (congress.gov) New York Department of Taxation and Finance: Estate Tax Basic Exclusion Amount 2026, $7,350,000 (tax.ny.gov) Seyfarth Shaw LLP: Planning for 2026, Trusts and Estates Tax Updates (seyfarth.com) DRS Law: Credit Shelter Trust Analysis, April 2026 (drs-law.com) Pierro, Connor & Strauss: Critical Federal and New York Tax Rules in 2026 (pierrolaw.com) |