For decades, the Credit Shelter Trust was a standard feature of estate plans for married couples with substantial assets. It was sometimes treated almost as a default: when the first spouse died, part of the estate went into a trust rather than passing everything outright to the surviving spouse.

But estate tax laws have changed dramatically.

Tennessee eliminated its inheritance tax years ago. The federal estate tax exemption is now extraordinarily high. And federal law allows married couples to use a concept called portability, which can preserve a deceased spouse’s unused federal estate tax exemption.

So does a Tennessee married couple still need a Credit Shelter Trust?

Sometimes the answer is no.

But in the right estate plan, the answer can still be an emphatic yes—because today’s Credit Shelter Trust may be as much about asset protection, remarriage protection, controlling the ultimate inheritance, and protecting future appreciation as it is about estate taxes.

Here is how Tennessee families should think about this powerful planning tool in 2026.

What Is a Credit Shelter Trust?

A Credit Shelter Trust is an irrevocable trust typically created when the first spouse in a married couple dies.

It may also be called a:

• Bypass Trust;
• Family Trust;
• B Trust;
• Exemption Trust; or
• Unified Credit Trust.

Although the terminology varies, the basic concept is similar.

Imagine that Jack and Susan have a revocable living trust.

While they are both alive, they generally retain control over their assets. Tennessee law recognizes revocable trusts, and unless a trust instrument provides otherwise, Tennessee’s Uniform Trust Code generally permits a settlor to revoke or amend a revocable trust.

When Jack dies, however, the trust can direct that some of Jack’s property be placed into a separate irrevocable trust.

Susan can usually receive benefits from that trust during her lifetime.

But Susan does not necessarily own the trust property outright.

That distinction is the heart of Credit Shelter Trust planning.

Why Is It Called a “Credit Shelter” Trust?

Historically, the primary purpose was federal estate tax planning.

Each spouse had an estate tax exemption. The problem was that simply leaving everything to the surviving spouse could potentially waste the first spouse’s exemption under older law.

A Credit Shelter Trust solved the problem.

Instead of giving everything outright to the surviving spouse, the deceased spouse funded a trust with assets up to the available estate tax exemption.

The surviving spouse could benefit from the trust, but—if properly drafted—the assets would not generally be included in the survivor’s taxable estate when the survivor later died.

The assets effectively “bypassed” the surviving spouse’s estate.

Hence the other common name:

Bypass Trust.

The Federal Estate Tax Exemption Is Now $15 Million

This is where the conversation becomes very different in 2026.

The federal basic estate and gift tax exclusion is $15 million per individual for 2026.

That means a married couple potentially has access to a very substantial combined federal exemption, assuming proper planning and use of applicable tax rules.

For many Tennessee families, federal estate tax simply isn’t an immediate concern.

Consider a married couple with:

• $1.5 million home;
• $2 million investment portfolio;
• $1 million retirement accounts;
• $500,000 business interest; and
• $500,000 in other property.

Their combined estate is approximately $5.5 million.

That is significant wealth.

But it is still dramatically below the 2026 federal estate tax exemption applicable to even one individual.

A Credit Shelter Trust therefore may not be necessary solely to avoid federal estate tax.

Tennessee Doesn’t Currently Have an Inheritance Tax Either

Tennessee families have another advantage.

Tennessee’s inheritance tax was eliminated for individuals dying after December 31, 2015. The Tennessee Department of Revenue specifically states that the tax is no longer imposed for deaths occurring in 2016 or later.

That means a Tennessee resident does not currently need a Credit Shelter Trust simply to use a Tennessee estate or inheritance tax exemption.

This is an important distinction when reviewing an older Tennessee estate plan.

A trust drafted 15 or 20 years ago may contain complicated A/B trust provisions that were designed around tax laws that no longer exist.

That doesn’t necessarily mean the trust is bad.

It does mean it deserves another look.

So Why Would Anyone Still Use a Credit Shelter Trust?

Because taxes aren’t the only reason to use trusts.

For some Tennessee families, the non-tax advantages of the trust may actually be more important.

1. Protecting the Children’s Ultimate Inheritance

Suppose John and Mary have three children.

John dies.

If John’s entire estate passes outright to Mary, those assets now belong to Mary.

Mary may subsequently:

• change her will;
• change her trust;
• make large gifts;
• favor one child over another;
• leave money to someone else;
• remarry; or
• inadvertently lose assets.

John may have wanted Mary to be financially secure while also wanting whatever remained of his property ultimately to pass to their children.

A Credit Shelter Trust can potentially accomplish both objectives.

Mary receives the benefit of the property.

But John determines where the remaining trust property goes after Mary’s death.

That can provide substantially more certainty than an outright inheritance.

2. Remarriage Protection

This may be one of the most compelling reasons to consider a Credit Shelter Trust.

Suppose a husband dies at 62.

His wife eventually remarries.

There is nothing unusual about that.

But if the husband left everything outright to his wife, his property becomes part of her financial life with her new spouse.

That can create complications.

The surviving spouse could:

• retitle assets jointly with the new spouse;
• purchase property with the new spouse;
• change beneficiaries;
• revise her estate plan;
• make gifts to the new spouse; or
• leave part of the estate to the new spouse at death.

A properly structured trust can allow the surviving spouse to benefit from the deceased spouse’s assets without giving the surviving spouse unrestricted ownership over them.

For families concerned about preserving assets for children, this can be extremely valuable.

3. Blended Families

Credit Shelter Trusts can be particularly useful in second marriages.

Imagine this situation:

Robert has two children from his first marriage.

He marries Linda, who has three children of her own.

Robert wants Linda financially protected if he dies first.

But he ultimately wants his remaining property to pass to his children.

Leaving everything outright to Linda creates obvious risk.

Even if Linda fully intends to honor Robert’s wishes today, circumstances can change over the next 10, 20 or 30 years.

A trust provides another option.

Robert’s property can remain in trust for Linda’s benefit during her lifetime, with the remainder passing to Robert’s children.

That creates a legally enforceable structure rather than relying entirely on future promises.

4. Creditor Protection

Tennessee law expressly recognizes spendthrift provisions in trusts.

Under Tenn. Code Ann. § 35-15-502, a properly drafted spendthrift provision can restrain voluntary and involuntary transfers of a beneficiary’s trust interest, and a creditor generally cannot reach the beneficiary’s interest or a future distribution at the trust level in violation of the provision.

That does not mean every Credit Shelter Trust automatically provides absolute creditor protection.

Trustee powers, distribution standards, beneficiary rights and the nature of a particular creditor claim all matter.

But there can be an important difference between:

“I own $2 million.”

and

“I am the beneficiary of a $2 million irrevocable trust.”

Proper trust design can potentially provide protections that outright ownership cannot.

5. Protecting Future Appreciation

This is one of the more sophisticated reasons Credit Shelter Trusts can remain useful even when an estate isn’t currently taxable.

Suppose the first spouse dies with $5 million placed into a properly structured Credit Shelter Trust.

The surviving spouse lives another 25 years.

During that period, the assets grow to $15 million.

If structured appropriately, that appreciation may remain outside the surviving spouse’s taxable estate.

That can become extremely valuable.

Estate planning shouldn’t necessarily focus exclusively on what a family owns today.

The better question may be:

What could these assets be worth when the surviving spouse dies?

A successful business, concentrated stock portfolio or valuable real estate can change the answer dramatically.

6. Protecting Against Changes in the Surviving Spouse’s Estate Plan

People sometimes assume:

“My spouse will leave everything to the children.”

Maybe.

But an estate plan isn’t necessarily permanent.

If the survivor owns everything outright, the survivor generally controls the ultimate disposition of those assets.

A Credit Shelter Trust can make the first spouse’s plan irrevocable as to the property placed into that trust.

That can be especially important when the first spouse wants to guarantee that certain beneficiaries eventually inherit.

How Does the Surviving Spouse Access the Money?

A common misconception is that assets placed in a Credit Shelter Trust become inaccessible.

That doesn’t have to be the case.

Depending upon the trust’s design, the surviving spouse may be entitled to income and may receive principal distributions under specified standards.

For example, distributions might be permitted for the spouse’s:

• health;
• education;
• maintenance; and
• support.

Those familiar with trust planning will recognize this as the commonly used HEMS standard.

Other trusts may provide broader or more restrictive distribution authority depending upon the family’s objectives.

The surviving spouse might also serve as trustee in some structures, although the powers granted to a spouse serving as trustee must be carefully drafted when tax and asset-protection objectives are involved.

What About Portability?

Portability dramatically changed married-couple estate planning.

Federal law can permit a surviving spouse to use a deceased spouse’s unused estate tax exclusion—known as the Deceased Spousal Unused Exclusion, or DSUE.

The IRS confirms that a deceased spouse’s unused exclusion can be added to the surviving spouse’s basic exclusion amount when the required portability election is made. The election generally involves filing Form 706 for the deceased spouse’s estate, even in circumstances where the estate would not otherwise be required to file an estate tax return.

This means married couples don’t necessarily need a Credit Shelter Trust simply to preserve the first spouse’s unused federal exemption.

But portability and Credit Shelter Trusts aren’t identical.

Portability generally preserves an unused dollar amount of exemption.

A Credit Shelter Trust can potentially remove the future appreciation of the trust property from the surviving spouse’s taxable estate.

That distinction can become significant.

A Simple Example

Assume Husband and Wife own a combined $20 million estate.

Husband dies and $10 million passes into a properly structured Credit Shelter Trust.

Wife benefits from the trust for the remainder of her life.

Twenty years later, those assets are worth $25 million.

If the trust was properly designed and administered, the assets may potentially remain outside Wife’s taxable estate.

Compare that with transferring the $10 million directly to Wife.

If the property appreciates to $25 million, the entire value may potentially become part of Wife’s estate.

The difference can be enormous.

Credit Shelter Trust vs. Marital Trust

These two concepts are sometimes confused.

A Credit Shelter Trust generally seeks to use the deceased spouse’s exemption and keep trust property outside the surviving spouse’s taxable estate.

A Marital Trust, often structured as a Qualified Terminable Interest Property or QTIP Trust, generally qualifies for the marital deduction so that estate taxation is deferred until the surviving spouse’s death.

Some sophisticated estate plans use both.

This is where the familiar “A/B Trust” terminology comes from.

Depending upon the plan:

Trust A might represent the survivor’s or marital share.

Trust B might represent the Credit Shelter or Family Trust.

Modern estate plans can be considerably more flexible than the traditional mandatory A/B structure.

The Income Tax Trade-Off

There is another issue that should not be ignored: basis.

Assets included in a person’s taxable estate generally receive an income-tax basis adjustment at death under federal law.

Property placed into a Credit Shelter Trust may receive a basis adjustment when the first spouse dies.

But if the trust property is excluded from the surviving spouse’s estate, it may not receive another basis adjustment when the surviving spouse later dies.

That creates a potential trade-off.

Suppose stock worth $1 million when Husband dies is placed into a Credit Shelter Trust.

By Wife’s death, it is worth $4 million.

Keeping the stock outside Wife’s taxable estate may be wonderful if estate taxes are the primary concern.

But if Wife’s estate is nowhere near the estate tax threshold, obtaining another basis adjustment at Wife’s death could potentially have been more valuable.

This is why modern estate planning should not reflexively use Credit Shelter Trusts.

The estate-tax benefits have to be weighed against potential income-tax consequences.

An Old A/B Trust May Need to Be Reviewed

Tennessee residents with estate plans prepared before 2016—or even before the dramatic increases in the federal estate tax exemption—should consider reviewing them.

An older trust may say that when the first spouse dies, the maximum amount that can pass free of estate tax automatically goes into a Credit Shelter Trust.

That provision may have made perfect sense when the estate tax exemption was $1 million or $2 million.

It can produce very different consequences with a $15 million federal exemption.

For example, a formula designed to fund the Credit Shelter Trust with the “maximum amount that can pass free of federal estate tax” could potentially allocate substantially more property to an irrevocable trust than the couple ever intended under today’s exemption.

The drafting needs to be read in the context of today’s law.

Modern Trusts Can Be More Flexible

Estate planning doesn’t necessarily have to be:

Credit Shelter Trust or no Credit Shelter Trust.

Modern planning can incorporate flexibility.

Depending upon the circumstances, attorneys may consider techniques involving:

• disclaimer planning;
• portability;
• QTIP elections;
• powers of appointment;
• trust protectors;
• decanting;
• formula provisions; and
• other mechanisms designed to respond to the circumstances existing when the first spouse actually dies.

Tennessee’s trust statutes provide significant flexibility in trust administration. For example, Tennessee law permits trust instruments to grant certain persons powers to direct trustee actions or modification and recognizes trustee authority, under specified circumstances, to appoint assets from one trust into another trust.

That flexibility can be valuable because a couple drafting a trust at age 50 cannot know what their assets, family relationships or tax laws will look like when one spouse dies decades later.

Who Should Consider a Credit Shelter Trust in Tennessee?

A Credit Shelter Trust may deserve serious consideration when a married couple:

• has a large or rapidly appreciating estate;
• owns a valuable closely held business;
• owns substantial investment or real estate assets;
• expects significant future appreciation;
• has children from prior relationships;
• wants to protect children’s inheritances;
• is concerned about remarriage;
• wants greater creditor protection for inherited assets;
• wants to control where assets ultimately pass; or
• wants to preserve assets for children or future generations.

By contrast, a married couple with a relatively modest estate, uncomplicated family situation and no significant asset-protection concerns may determine that the administrative complexity of a mandatory Credit Shelter Trust isn’t justified.

Don’t Build the Estate Plan Around Today’s Tax Number Alone

The biggest mistake is treating estate planning as a math problem based solely on today’s exemption.

In 2026, the federal estate tax exemption is $15 million per individual.

That is an enormous amount.

But estate planning can last decades.

Businesses grow.

Real estate appreciates.

Investment accounts compound.

Families change.

People divorce and remarry.

Children develop financial problems.

Creditors appear.

And Congress changes tax laws.

A good estate plan should account for uncertainty rather than assume today’s circumstances will remain permanent.

The Bottom Line for Tennessee Families

Credit Shelter Trusts are not obsolete.

Their role has simply changed.

Years ago, they were often primarily estate-tax tools.

Today, for many Tennessee families, they may be better viewed as wealth-preservation and family-protection tools that can also provide estate-tax advantages.

Tennessee no longer imposes its inheritance tax for deaths occurring in 2016 or later, and the federal estate tax exemption is $15 million per individual in 2026.

That means many married couples do not need a traditional mandatory Credit Shelter Trust purely for tax reasons.

But taxes aren’t the entire estate plan.

If your goals include protecting assets from a surviving spouse’s remarriage, preserving an inheritance for children, planning for a blended family, protecting future appreciation or controlling where property ultimately goes, a Credit Shelter Trust may still be an extremely valuable component of a Tennessee estate plan.

The question is no longer simply:

“Do we need a Credit Shelter Trust to avoid estate taxes?”

The better question is:

“What do we want to happen to our assets after the first spouse dies—and what protections do we want in place for the decades that follow?”

That is the question a well-designed Tennessee estate plan should answer.

This article is for general educational purposes and is not legal or tax advice. Estate and trust planning is highly fact-specific, and federal and Tennessee laws can change. Individuals should consult qualified estate-planning and tax professionals regarding their particular circumstances.