What is a “Bypass Trust” in a will?
A bypass trust is an estate planning tool employed by married couples who wish to take advantage of both of their estate tax exemptions, thereby saving hundreds of thousands of dollars in federal estate taxes. While the federal estate tax is currently non-existent, it is safe to assume that the rate of taxation will soon return to familiar percentages. Planning for this, it behooves married persons to consider establishing a will that allows them to pass on as much of their estate as possible to their loved ones.
In a simple will, all property passes to the surviving spouse when one party dies. This scenario qualifies for the marital deduction; however, once the surviving spouse passes away, they have only one estate tax exemption to apply to property passed to the couple's children. A bypass trust, also known as a credit shelter trust or an A/B trust, allows a married couple to use both of their estate tax exemptions.
The way a bypass trust allows married couples to avoid federal estate taxes is by leaving the exemption amount available upon the first spouse's death to a trust that provides the surviving spouse with a lifetime income. Once the surviving spouse passes away, the remaining funds in the trust will then be distributed among the couple's children. This trust, if properly created and maintained, is not subject to the federal estate tax because the surviving spouse cannot be deemed the owner of the trust.