For Massachusetts families seeking to preserve wealth and minimize estate taxes, credit shelter trusts and marital trusts are two of the most important estate planning tools available. When structured correctly, they can reduce or even eliminate estate taxes while ensuring that a surviving spouse and other beneficiaries are properly provided for.

How Credit Shelter and Marital Trusts Work

Credit shelter and marital trusts are typically created after the first spouse passes away. They can originate from a single joint trust established by both spouses, or from two separate trusts set up by each spouse. When one spouse dies, the estate is divided to fund these two trusts, each with a specific purpose:

• Credit Shelter Trust (Bypass Trust): Designed to use the deceased spouse’s estate tax exemption, the assets placed in this trust are not included in the surviving spouse’s estate for estate tax purposes when he or she later passes away.
• Marital Trust (QTIP Trust): Created for the surviving spouse’s benefit, all income from this trust must be distributed to the surviving spouse at least annually. However, the assets in a marital trust are included in the surviving spouse’s estate upon his or her death.

The goal is to maximize available estate tax exemptions and minimize the overall tax burden at both deaths.

Federal vs. Massachusetts Estate Tax Differences

One of the biggest estate planning challenges for Massachusetts residents is the significant difference between the federal estate tax exemption and the Massachusetts estate tax exemption.

As of 2026:

• Federal exemption: $15,000,000
• Massachusetts exemption: $2,000,000

This means that while a credit shelter trust can hold up to $15 million under federal law, only $2 million can pass free of Massachusetts estate tax. Any excess beyond the Massachusetts exemption must be handled carefully to avoid triggering unnecessary state estate taxes.

The Role of the “Special” Marital Trust

To bridge the gap between state and federal estate tax exemptions, Massachusetts planners often use a special marital trust. This trust receives the portion of the estate that exceeds the Massachusetts estate tax exemption but is still under the federal estate tax exemption. While the special marital trust qualifies for the federal marital deduction (and is not taxed at the federal level), its assets are included in the surviving spouse’s Massachusetts taxable estate—allowing for a step-up in basis for Massachusetts, but not federal, income tax purposes.

For very large estates exceeding even the federal estate tax exemption (the “half-percenters”), a traditional marital trust is also created to receive the remaining assets.

Tax Administration and Trustee Responsibilities

Both credit shelter and marital trusts are separate taxable entities, each requiring their own Employer Identification Number (EIN) and fiduciary income tax returns. Trustees are responsible for ensuring compliance with both federal and Massachusetts fiduciary tax rules.

If trust income is distributed to beneficiaries, Schedules K-1 must be prepared. The “65-day rule,” which allows certain distributions to be treated as having occurred in the prior tax year for federal purposes, does not apply in Massachusetts—so all income must be distributed before year-end to secure the state income distribution deduction.

Funding the Trusts: Pecuniary vs. Fractional Formulas

When determining how much of an estate should fund each trust, trusts typically contain one of two approaches:

• Pecuniary Formula: Specifies a fixed dollar amount (based on exemption limits) to fund the credit shelter trust or marital trust. This method is straightforward (easiest to implement) and often preferred when assets are transferred promptly after death.  In the case of appreciation in the value of assets between date of decedent’s death and date of surviving spouse’s death, it may make the most sense to get the most appreciation out of the surviving spouse’s estate.  However, any appreciation between date of death and date of funding will result in capital gain having to be paid and reported on the respective fiduciary income tax returns.
• Fractional Formula: Allocates a percentage of each asset between the trusts. While this avoids certain capital gains recognition events if funding is delayed, it can be administratively complex and may result in uneven appreciation or depreciation between trusts.

The Importance of Timely Estate Tax Filings

If the combined estate of a married couple exceeds the Massachusetts exemption when the first spouse dies, a Massachusetts estate tax return must be filed. This return documents which assets fund the credit shelter, special marital, and marital trusts. Upon the surviving spouse’s death, the estate will again be reviewed to determine whether Massachusetts estate tax applies. The primary advantage of the credit shelter trust is that its value remains excluded from the surviving spouse’s taxable estate.

Guidance Is Essential

The interplay between state and federal estate tax law, trust funding formulas, and fiduciary tax rules can be highly technical. Even small missteps in trust drafting, funding, or administration can have costly tax consequences. Working with an experienced estate planning attorney and CPA is the best way to ensure that your estate plan is structured to protect both your wealth and your family.

At Beliveau Law Group, LLC, our attorneys and tax professionals work closely with clients throughout Massachusetts to design sophisticated yet practical estate plans that minimize taxes and preserve family assets. To learn more about how credit shelter trusts or marital trusts can fit into your estate plan, contact Beliveau Law Group today.