Credit Shelter Trust Agreement (Bypass / Family Trust)

CREDIT SHELTER TRUST AGREEMENT (BYPASS / FAMILY TRUST)

TABLE OF CONTENTS

1. Establishment and Funding
2. Definitions
3. Funding Formula
4. Distribution Provisions — Surviving Spouse
5. Distribution Provisions — Children and Other Descendants
6. Termination and Distribution of Remainder
7. Trustee Provisions
8. Tax Provisions and GST Allocation
9. State Estate Tax Planning
10. Spendthrift and Asset Protection
11. General Provisions
12. Execution

ARTICLE I: ESTABLISHMENT AND FUNDING

Section 1.1 Trust Name

This Trust shall be known as the [DECEASED SPOUSE NAME] Credit Shelter Trust (also referred to herein as the "Family Trust" or the "Bypass Trust" and, together with this agreement, the "Trust").

Section 1.2 Settlor / Testator

Settlor (the "Deceased Spouse"):
Name: [FULL LEGAL NAME OF DECEASED SPOUSE]
Address: [ADDRESS]
Date of Birth: [__/__/____]
State of Domicile: [STATE]

Section 1.3 Surviving Spouse

Surviving Spouse:
Name: [FULL LEGAL NAME OF SURVIVING SPOUSE]
Date of Birth: [__/__/____]

Section 1.4 Trustee

Initial Trustee of CST: [TRUSTEE NAME]

Successor Trustees:

1. [NAME, ADDRESS]
2. [NAME, ADDRESS]
3. [CORPORATE FIDUCIARY] — final fallback

Section 1.5 Effective Date

This Trust becomes effective and shall be funded upon the death of the Deceased Spouse, occurring on or after the date of execution of the underlying estate-planning document, which is [__/__/____].

Section 1.6 Governing Law

This Trust shall be governed by the laws of the State of [STATE].

ARTICLE II: DEFINITIONS

"Applicable Exclusion Amount" means the basic exclusion amount under IRC § 2010(c)(3), as in effect on the date of the Deceased Spouse's death, increased by any deceased spousal unused exclusion (DSUE) amount under IRC § 2010(c)(4) and any restored exclusion amount under IRC § 2010(c)(5). For 2026, the basic exclusion amount is $15,000,000 per individual under the One Big Beautiful Bill Act of 2025 (Pub. L. 119-21).

"Clayton Election" means a qualified disclaimer or executor election under IRC § 2056(b)(7)(B)(v) and Treas. Reg. § 20.2056(b)-7(d)(3) that causes property otherwise passing to a QTIP Marital Trust to instead pass to this Trust.

"DSUE" means the deceased spousal unused exclusion amount as defined in IRC § 2010(c)(4).

"Family Trust" / "Bypass Trust" / "B Trust" are synonyms for this Credit Shelter Trust.

"GST Exemption" means the generation-skipping transfer tax exemption under IRC § 2631, equal to the Applicable Exclusion Amount.

"HEMS" means health, education, maintenance, and support as defined by Treas. Reg. § 20.2041-1(c)(2).

"Marital Trust" means any trust qualifying for the federal estate tax marital deduction under IRC § 2056, including a QTIP Trust under IRC § 2056(b)(7).

"Survivor's Trust" means the trust holding assets passing outright to or in further trust for the Surviving Spouse and qualifying for the marital deduction.

ARTICLE III: FUNDING FORMULA

Section 3.1 Funding Amount

Upon the death of the Deceased Spouse, the Trustee shall fund this Credit Shelter Trust with that portion of the Deceased Spouse's estate equal to the Funding Amount determined under one of the following formulas (check the applicable formula):

☐ Pecuniary Formula (Reverse Pecuniary / "Survivor Gets the Pecuniary"). The Marital Trust shall be funded with a pecuniary amount equal to the smallest amount that, taking into account the unified credit, GST exemption, and other available credits, will produce zero federal estate tax. The residue shall fund this CST.

☐ Pecuniary Formula (Credit Shelter Pecuniary / "CST Gets the Pecuniary"). This CST shall be funded with a pecuniary amount equal to the Deceased Spouse's then-remaining Applicable Exclusion Amount. The residue passes to the Marital Trust or Surviving Spouse outright.

☐ Fractional Share Formula. The Deceased Spouse's estate shall be divided into two fractional shares: (a) the CST share, equal to a fraction whose numerator is the Applicable Exclusion Amount and whose denominator is the adjusted gross estate; and (b) the Marital Trust share, equal to one minus the CST fraction.

☐ Clayton Disclaimer Formula. All of the Deceased Spouse's residuary estate passes to a QTIP Marital Trust. The Surviving Spouse (or executor under a Clayton-style election) may, within nine (9) months of the Deceased Spouse's death, disclaim any portion of the QTIP Trust, with the disclaimed portion passing to this CST.

Section 3.2 Maximum Funding Cap

The Funding Amount shall not exceed the maximum amount that can pass to this CST free of federal and state estate tax, after taking into account all available credits, deductions, the Deceased Spouse's prior taxable gifts, and any DSUE from a predeceased spouse.

Section 3.3 State Estate Tax Adjustment

If the state of the Deceased Spouse's domicile imposes an estate tax with a lower exclusion than the federal exclusion (a "State Exclusion Gap"), the Funding Amount shall be reduced to the state exclusion amount unless the Surviving Spouse or Executor affirmatively elects otherwise. The state-exclusion gap shall be funded into:

☐ This CST (incurring no federal tax but no state tax either);

☐ A separate state-only QTIP trust (deferring state tax to second death);

☐ The Surviving Spouse outright (utilizing portability for federal, marital deduction for state).

Section 3.4 Allocation of Assets to CST

The Trustee shall fund this CST with assets selected to:

(a) Maximize basis step-up retention by allocating low-basis appreciated assets to the Marital Trust (which receives a second step-up at the survivor's death) and high-basis or rapidly-appreciating assets to this CST;

(b) Preserve GST-exempt status by allocating GST-exempt assets first to this CST or a separate GST-exempt sub-trust;

(c) Maintain liquidity for distributions to the Surviving Spouse and remainder beneficiaries.

ARTICLE IV: DISTRIBUTION PROVISIONS — SURVIVING SPOUSE

Section 4.1 Income Distributions

☐ Mandatory Income. During the Surviving Spouse's lifetime, the Trustee shall distribute all net income of this Trust to the Surviving Spouse at least quarterly.

☐ Discretionary Income. During the Surviving Spouse's lifetime, the Trustee may distribute net income to or for the benefit of the Surviving Spouse in such amounts as the Trustee, in the Trustee's discretion, deems advisable under the HEMS standard.

Section 4.2 Principal Distributions

The Trustee, in the Trustee's discretion, may distribute principal of this Trust to or for the benefit of the Surviving Spouse as the Trustee determines is necessary or advisable for the Surviving Spouse's health, education, maintenance, and support in the Surviving Spouse's accustomed standard of living (the "HEMS Standard").

Section 4.3 5-and-5 Withdrawal Power (Optional)

☐ The Surviving Spouse shall have a non-cumulative annual right to withdraw from this Trust an amount equal to the greater of $5,000 or 5% of the aggregate value of the Trust corpus as of December 31 of each calendar year (the "5-or-5 Power"). This 5-or-5 Power is intended to constitute a permitted general power of appointment under IRC § 2041(b)(2) without causing estate-tax inclusion of the Trust corpus.

Section 4.4 Consideration of Other Resources

In exercising principal-distribution discretion, the Trustee:

☐ Shall consider the Surviving Spouse's other available resources before invading principal;

☐ Shall not consider the Surviving Spouse's other resources and shall distribute as needed without regard to outside income.

Section 4.5 No General Power of Appointment

The Surviving Spouse shall have no general power of appointment over the Trust corpus, no power to compel distributions to or for the benefit of the Surviving Spouse, the Surviving Spouse's estate, the Surviving Spouse's creditors, or creditors of the Surviving Spouse's estate, except as expressly provided in Section 4.3.

Section 4.6 Limited Power of Appointment (Optional)

☐ The Surviving Spouse shall have a testamentary special (limited) power of appointment, exercisable by Will only with specific reference to this power, to appoint Trust property to or among the Deceased Spouse's descendants (excluding the Surviving Spouse, the Surviving Spouse's estate, the Surviving Spouse's creditors, and creditors of the Surviving Spouse's estate).

ARTICLE V: DISTRIBUTION PROVISIONS — CHILDREN AND OTHER DESCENDANTS

Section 5.1 Distributions to Descendants During Spouse's Lifetime (Optional)

☐ Spouse-Only Trust. During the Surviving Spouse's lifetime, the Trustee shall make distributions only to or for the benefit of the Surviving Spouse.

☐ Sprinkle Trust. During the Surviving Spouse's lifetime, the Trustee may, in the Trustee's discretion, distribute income and principal to or among the Surviving Spouse and the Deceased Spouse's descendants, in such amounts as the Trustee determines under the HEMS Standard, without obligation to treat the Surviving Spouse and descendants equally.

Section 5.2 Treatment Upon Death of Surviving Spouse

Upon the death of the Surviving Spouse, the Trustee shall divide the remaining Trust corpus into separate, equal shares per stirpes for the Deceased Spouse's then-living descendants, and shall hold each share as follows (select one):

☐ Outright Distribution. Each share shall be distributed outright and free of trust to the descendant entitled thereto.

☐ Continuing Trust for Each Descendant. Each share shall be held in a separate continuing trust for the benefit of the descendant under the terms set forth in Schedule B (Descendant's Trust).

☐ Age-Staggered Distribution. Each share shall be held in trust until the descendant reaches:

• One-third upon attaining age [____];
• One-half of the remaining balance upon attaining age [____];
• The balance upon attaining age [____].

ARTICLE VI: TERMINATION AND DISTRIBUTION OF REMAINDER

Section 6.1 Termination Date

This Trust shall terminate upon the first to occur of:

(a) The death of the Surviving Spouse (if the trust calls for outright distribution at that time);

(b) The expiration of all separate descendant sub-trusts created under Section 5.2;

(c) The Rule Against Perpetuities saver date set forth in Section 6.3.

Section 6.2 Final Distribution

Upon termination, all remaining Trust property shall be distributed to the Deceased Spouse's then-living descendants, per stirpes, or, in default of descendants, to the contingent beneficiaries identified below:

Contingent Beneficiaries (in order of priority):

1. [NAME OR CLASS, e.g., "Deceased Spouse's siblings, per stirpes"]
2. [NAME OR CLASS]
3. [NAMED CHARITY OR CHARITIES]

Section 6.3 Rule Against Perpetuities Saver

Notwithstanding any other provision, if the governing-law state imposes a Rule Against Perpetuities and this Trust would otherwise violate it, all interests shall vest not later than twenty-one (21) years after the death of the last to die of the Deceased Spouse, the Surviving Spouse, and the descendants of the Deceased Spouse living at the Effective Date.

ARTICLE VII: TRUSTEE PROVISIONS

Section 7.1 Powers of Trustee

The Trustee shall have all powers granted by the governing-law state's trust code, plus the following additional powers:

(a) Retain, invest, and reinvest Trust property in any prudent investment;

(b) Sell, exchange, lease, mortgage, pledge, or otherwise dispose of Trust property;

(c) Vote securities, exercise stock options, participate in reorganizations;

(d) Borrow funds and encumber Trust property;

(e) Make tax elections, including portability, QTIP, GST, and § 645 elections;

(f) Settle, compromise, or litigate claims;

(g) Employ professionals (attorneys, CPAs, investment advisors) and pay reasonable fees from Trust assets;

(h) Distribute assets in kind, in cash, or in any combination;

(i) Divide the Trust into separate trusts for tax efficiency (e.g., GST-exempt and GST-nonexempt sub-trusts);

(j) Merge this Trust with any other trust with substantially similar terms.

Section 7.2 Surviving Spouse as Trustee

If the Surviving Spouse serves as Trustee:

(a) The Surviving Spouse's discretion to make principal distributions to the Surviving Spouse is limited to the HEMS Standard;

(b) The Surviving Spouse shall not make any distribution to discharge the Surviving Spouse's legal obligation of support;

(c) The Surviving Spouse shall not participate in any discretionary distribution decision that would constitute a general power of appointment under IRC § 2041;

(d) An Independent Co-Trustee shall be appointed to exercise discretion that exceeds the HEMS Standard or that involves the Surviving Spouse's legal support obligations.

Section 7.3 Trustee Compensation

The Trustee shall be entitled to reasonable compensation as agreed in writing or, absent agreement, as provided by the governing-law state.

Section 7.4 Trustee Removal and Replacement

The Surviving Spouse (acting in a non-fiduciary capacity) may remove and replace the Trustee, provided that the replacement Trustee is not a "related or subordinate party" within the meaning of IRC § 672(c) (the "Rev. Rul. 95-58 safe harbor").

Section 7.5 Bond Waived

No Trustee shall be required to post bond, except as required by law and not waivable.

Section 7.6 Accountings

The Trustee shall provide annual written accountings to the Surviving Spouse and the adult remainder beneficiaries.

ARTICLE VIII: TAX PROVISIONS AND GST ALLOCATION

Section 8.1 Intended Federal Tax Treatment

This Trust is structured with the intent that:

(a) The Trust corpus shall be EXCLUDED from the Surviving Spouse's gross estate for federal estate tax purposes under IRC § 2041 and Treas. Reg. § 20.2041-1, by reason of the HEMS-only distribution standard, the absence of a general power of appointment (except the permitted 5-or-5 Power), and the Surviving Spouse-Trustee limitations of Section 7.2;

(b) The Trust shall qualify as a separate non-grantor taxpayer following the Deceased Spouse's death, filing Form 1041 and paying tax on undistributed net income;

(c) Distributions to beneficiaries shall carry out distributable net income (DNI) under IRC § 661 and § 662.

Section 8.2 GST Exemption Allocation

The Deceased Spouse's GST Exemption under IRC § 2631 shall be allocated as follows:

☐ Allocate the entire GST Exemption to this Trust (rendering it GST-exempt with a zero inclusion ratio);

☐ Divide this Trust into a GST-Exempt sub-trust (funded with assets equal to the available GST exemption) and a GST-Nonexempt sub-trust (funded with the balance), pursuant to Treas. Reg. § 26.2654-1(b);

☐ Defer GST allocation and allow the Surviving Spouse or Trustee to allocate later by filing Form 709.

Section 8.3 No Reverse-QTIP Election

This Trust is not intended to be a Marital Trust and shall not be subject to the QTIP election under IRC § 2056(b)(7). If the Funding Formula uses a Clayton-disclaimer mechanism, the portion that funds this Trust shall be the portion as to which the Surviving Spouse or executor has affirmatively disclaimed or declined the QTIP election.

Section 8.4 Basis Reporting

The Trustee shall file Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent) with respect to assets received from the Deceased Spouse's estate, and shall furnish Schedule A to each beneficiary acquiring an interest in such property.

Section 8.5 Tax Reimbursement (If Applicable)

Should this Trust be treated as a grantor trust as to the Surviving Spouse (e.g., due to an inadvertent power), the Trustee may reimburse the Surviving Spouse for any income tax attributable to Trust income, but only if such reimbursement does not constitute a general power of appointment causing estate-tax inclusion.

ARTICLE IX: STATE ESTATE TAX PLANNING

Section 9.1 Non-Portability State Warning

The following table summarizes state estate-tax thresholds. Verify current law before relying on these figures.

Section 9.2 Funding to State Exclusion

If the Deceased Spouse was domiciled in a state listed above, the Funding Amount may be limited to the state exclusion in order to avoid state estate tax at the first death. The gap between the state exclusion and the federal exclusion may pass:

☐ Outright to the Surviving Spouse (or to a state-only QTIP), preserving the marital deduction for state purposes;

☐ Into this CST, paying state estate tax at the first death in exchange for permanent exclusion at the second death.

Section 9.3 Trustee Authority to Make State QTIP Election

The Trustee is authorized to make any state-level QTIP, marital, or partial elections necessary to minimize combined federal and state estate tax.

ARTICLE X: SPENDTHRIFT AND ASSET PROTECTION

Section 10.1 Spendthrift Clause

No beneficiary shall have the power to anticipate, assign, pledge, sell, transfer, or encumber any interest in this Trust, nor shall any interest in this Trust be subject to attachment, execution, garnishment, or other legal or equitable process for the claims of creditors, divorcing spouses, or in bankruptcy, prior to actual receipt by the beneficiary.

Section 10.2 Marital Property Protection

Distributions from this Trust to the Surviving Spouse or to descendants shall remain the separate property of the recipient and shall not become community, marital, or jointly-titled property unless the recipient affirmatively elects in writing.

Section 10.3 Remarriage Protection (Optional)

☐ If the Surviving Spouse remarries after the Deceased Spouse's death, the Surviving Spouse's right to receive principal distributions from this Trust shall terminate / continue at the discretion of an Independent Co-Trustee / continue unaffected.

ARTICLE XI: GENERAL PROVISIONS

Section 11.1 Severability

If any provision is held invalid, the remaining provisions shall continue in full force.

Section 11.2 No-Contest Clause

If any beneficiary contests the validity of this Trust or any provision hereof, that beneficiary's interest shall be reduced to the minimum required by applicable law (or, where permitted, eliminated entirely).

Section 11.3 Construction

Headings are for convenience only. Singular includes plural; gender references include all genders.

Section 11.4 Coordination with Pour-Over Will and RLT

This Trust is part of an integrated estate plan that includes the Deceased Spouse's Last Will and Testament and Revocable Living Trust, both dated [__/__/____]. To the extent of any conflict, the funding directions of the underlying instrument controlling the Deceased Spouse's residuary estate shall control.

Section 11.5 Jurisdiction and Venue

The exclusive jurisdiction and venue for any dispute arising under this Trust shall be the courts of [STATE], county of [COUNTY].

EXECUTION

IN WITNESS WHEREOF, the Deceased Spouse, intending to be legally bound, has executed this Credit Shelter Trust Agreement (or has incorporated these terms by reference into the Deceased Spouse's Revocable Living Trust or Will) on the date written below.

ACKNOWLEDGMENT

STATE OF [STATE]
COUNTY OF [COUNTY]

On this [__] day of [__________], [____], before me, the undersigned notary public, personally appeared [DECEASED SPOUSE NAME], proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument, and acknowledged that this instrument was executed in the person's authorized capacity for the purposes therein contained.

WITNESS my hand and official seal.

Notary Public: [________________________________]
My Commission Expires: [__/__/____]

SCHEDULE A — INITIAL FUNDING WORKSHEET

SCHEDULE B — DESCENDANT'S TRUST PROVISIONS (If Section 5.2 elects continuing trust)

[Insert detailed terms for separate continuing trust for each descendant: trustee, HEMS standard, distribution ages, special-needs provisions, GST allocation, perpetuities saver, etc.]

Sources and References

• IRC § 2010(c) — Applicable Exclusion Amount and Portability of DSUE
• IRC § 2056 — Marital Deduction
• IRC § 2056(b)(7) — QTIP Election
• IRC § 2518 — Qualified Disclaimer (Clayton-style funding)
• IRC § 2631 and § 2642 — GST Exemption and Inclusion Ratio
• IRC § 2041 — General Powers of Appointment (5-or-5 Power; HEMS Limitation)
• IRC § 1014 — Basis at Death (Step-Up Tradeoff)
• Treas. Reg. § 20.2010-2 — Portability Election Procedure (Form 706)
• Treas. Reg. § 20.2041-1(c)(2) — Ascertainable HEMS Standard
• Treas. Reg. § 20.2056(b)-7 — QTIP Requirements
• Treas. Reg. § 26.2654-1(b) — Severance of Trust for GST Purposes
• Rev. Rul. 95-58, 1995-2 C.B. 191 — Trustee-Removal Safe Harbor (Independent Successor)
• Rev. Rul. 60-87 — IRD Recognition on Pecuniary Funding
• One Big Beautiful Bill Act of 2025 (Pub. L. 119-21) — Permanent $15M Exemption for Tax Year 2026, Indexed for Inflation Starting 2027
• IRS Form 706 — United States Estate (and Generation-Skipping Transfer) Tax Return
• IRS Form 709 — United States Gift (and Generation-Skipping Transfer) Tax Return
• IRS Form 1041 — U.S. Income Tax Return for Estates and Trusts
• IRS Form 8971 — Information Regarding Beneficiaries Acquiring Property from a Decedent

DISCLAIMER: This template is provided for informational and educational purposes only and does not constitute legal advice. Credit shelter / bypass trust planning involves complex federal and state tax considerations, including portability, GST exemption allocation, basis step-up tradeoffs, and state estate tax compliance. Before executing or funding a credit shelter trust, consult a qualified estate planning attorney and a CPA or enrolled agent in the relevant jurisdictions.