A trust subject to estate tax in the decedent's estate that is funded with the applicable exclusion amount, thus producing no tax due.

• A. Qualified Domestic Trust
• B. Credit shelter
• C. Charitable remainder
• D. Irrevocable life insurance

Answer: (B)

The idea being tested is using the decedent’s unused estate tax exemption to shelter assets in a credit shelter (bypass) trust. When a trust is funded at death with an amount equal to the applicable exclusion, that portion of the estate is allocated to the trust and effectively uses up the deceased person’s exemption. As a result, the assets inside the trust are not taxed in the decedent’s estate, so no estate tax is due on that portion. The trust can still provide for the surviving spouse or other beneficiaries, but the key point is that funding with the exemption amount protects the assets from estate tax in the decedent’s estate. Other options involve different tax planning goals (such as providing for a non-citizen spouse, benefiting charity, or removing life insurance from the estate) and do not accomplish sheltering assets via the deceased’s unused exemption in the same way.