Washington Credit Shelter Trust and Bypass Trust: Protecting Both Spouses' Exemptions

Married couples with combined assets near or above $3,000,000 face a Washington estate tax trap that catches families off guard every year. The simplest way to spring it: leave everything to your spouse. The simplest way to avoid it: a credit shelter trust. Here is why this matters so much in Washington specifically, and how the mechanism works.

The Trap: Washington Does Not Allow Portability

The federal estate tax allows something called "portability." If a spouse dies with unused federal exemption — currently $15,000,000 per person — the surviving spouse can inherit that unused exemption and add it to their own. A couple can effectively shelter up to $30,000,000 from federal estate tax by electing portability on a timely filed Form 706.

Washington explicitly rejects portability. The state estate tax exemption — currently $3,000,000 — is strictly per-person and dies with the person. It cannot be transferred to a surviving spouse.

Here is what this means in practice.

A couple has a combined estate of $5,000,000. The first spouse dies and leaves everything to the surviving spouse. The unlimited marital deduction shields the transfer from estate tax at the first death — no tax is owed. But the first spouse's $3,000,000 Washington exclusion is permanently, irrevocably lost.

When the surviving spouse later dies with a $5,000,000 estate, they can only shelter $3,000,000 with their own exclusion. The remaining $2,000,000 is fully taxable at Washington's graduated rates. At the 14-16% rates applicable to a $2,000,000 taxable estate, the tax bill is roughly $280,000 to $320,000 — money that would not have been owed if the first spouse's exemption had been preserved.

The Solution: Credit Shelter Trust

A Credit Shelter Trust (also called a Bypass Trust or A/B Trust) is an irrevocable trust established at the first spouse's death to capture and preserve the first spouse's Washington exclusion.

How it works:

At the first spouse's death, the estate is divided into two parts:

A Trust (Marital Trust): Funded with assets above the exemption amount. Typically designed to qualify for the unlimited marital deduction (often structured as a Qualified Terminable Interest Property or QTIP trust). This portion passes to the surviving spouse tax-free at the first death.

B Trust (Bypass Trust / Credit Shelter Trust): Funded with assets up to the first spouse's Washington exclusion amount — currently $3,000,000. This trust is irrevocable and does not qualify for the marital deduction. Tax is technically due on the B Trust assets at the first death, but the applicable exclusion shelters the amount exactly — so no tax is actually paid.

The surviving spouse can receive income from the B Trust during their lifetime. They may also have limited access to the principal for health, education, maintenance, and support purposes, depending on how the trust is drafted. But crucially, the surviving spouse does not own the B Trust principal. They cannot withdraw it freely or include it in their estate.

At the second spouse's death, the B Trust assets are distributed to the named beneficiaries (typically the children) without being included in the second spouse's gross estate. The B Trust effectively passed through the second death without being taxed again.

The result for the same $5,000,000 couple:

At the first death, $3,000,000 goes into the B Trust (sheltered by the first spouse's exclusion, zero tax). $2,000,000 goes to the surviving spouse via the marital deduction (zero tax, unlimited marital deduction applies).

At the second death, the surviving spouse's taxable estate is $2,000,000 (their own assets). Their $3,000,000 exclusion shelters it entirely. Zero Washington estate tax at either death.

Without the B Trust, the second death produced a $280,000+ tax bill. With it, zero. That is the value of preserving both exclusions.

Cost to Implement

A credit shelter trust structure requires a properly drafted estate plan, typically created with an estate planning attorney. Costs vary but expect:

• Attorney fees to draft: $2,000 to $6,000 for the full estate plan (wills + trust + funding documents)
• Annual trust administration: The B Trust is irrevocable and becomes active at the first death. The surviving spouse as trustee must file a separate trust income tax return (Form 1041) for the B Trust during their lifetime if it generates income. CPA fees for trust returns typically run $700 to $1,500 per year
• Funding: The trust only works if assets are actually titled into the B Trust at the first spouse's death. This is not automatic; it requires action at the time of death

The legal fees to create a credit shelter trust structure are a fraction of the estate tax savings for a $5,000,000 or $6,000,000 estate. Even for estates closer to $4,000,000, the calculation almost always favors the upfront legal cost.

Washington Does Not Have a Gift Tax

One additional tool available to Washington residents: Washington does not impose a state-level gift tax. While the federal government imposes gift tax (and provides a $19,000 annual exclusion per donee for 2026, along with the lifetime $15,000,000 exemption), Washington has no separate gift tax.

This means that wealthy Washington residents facing the frozen $3,000,000 state exemption can use the federal annual gift tax exclusion to systematically reduce their taxable estate. Gifting $19,000 per year to each of four children is $76,000 per year removed from the taxable estate without any federal gift tax return required and with zero Washington tax consequence. Over ten years, that is $760,000 removed from the estate — potentially below the Washington estate tax threshold or meaningfully reducing the taxable amount.

The Spousal Residence Exclusion as an Alternative

For estates that hover near the $3,000,000 threshold without a credit shelter trust in place, Washington offers the Spousal Personal Residence Exclusion. If the decedent's half of a primary residence passes to the surviving spouse (outright or into a qualifying trust), that value can be excluded from the gross estate calculation when determining whether the estate meets the filing threshold.

If a decedent's gross estate is $3,500,000 but $600,000 of that is their half of the primary residence passing to the spouse, the adjusted gross estate falls to $2,900,000 — below the threshold. No Washington estate tax return is required.

This exclusion is less powerful than a fully funded credit shelter trust but provides a lifeline for estates that did not plan ahead. It cannot preserve the first spouse's exemption for the second death the way a credit shelter trust does, but it may eliminate the immediate tax obligation at the first death.

What to Do If the First Spouse Has Already Died

If the first spouse has died recently and no credit shelter trust was created, the surviving spouse may still be able to take advantage of the marital deduction on the estate tax return (if one is required) and consider restructuring their own estate plan to maximize what can be done for the second death. Options include:

• Establishing a revocable living trust with credit shelter provisions for the second spouse's death
• Using annual gifting strategies to bring the estate below $3,000,000 before the second death
• Evaluating charitable bequests that can be structured as a deduction on the eventual estate tax return

None of these strategies are as effective as a properly funded A/B Trust structure implemented before the first death, but they can still reduce the eventual Washington estate tax meaningfully.

The Washington Final Tax & Estate Tax Guide at /us/washington/estate-tax/ walks through the credit shelter trust mechanics, the Table W tax calculation showing the dollar difference with and without preserved exemptions, and the Spousal Personal Residence Exclusion rules in detail.

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