What is a bypass trust?
A bypass trust, also known as a credit shelter trust or a family trust, is a type of trust that is often created as part of an estate plan. The purpose of a bypass trust is to preserve the estate tax exemption of the first spouse to die, so that the surviving spouse can use the deceased spouse’s estate tax exemption when they die.
Here’s how it works: When a person dies, their estate may be subject to estate taxes if its value exceeds a certain amount, which is known as the estate tax exemption. In 2021, the estate tax exemption is $11.7 million per person. If the value of the deceased person’s estate is less than the exemption amount, no estate taxes will be due. If the value of the estate exceeds the exemption amount, the excess will be subject to estate taxes at a rate of up to 40%.
If a bypass trust is in place, the deceased person’s assets will be transferred to the trust upon their death, rather than being passed directly to the surviving spouse. This allows the deceased person’s estate tax exemption to be preserved, so that it can be used by the surviving spouse when they die. The surviving spouse can then use their own estate tax exemption, plus the deceased spouse’s preserved exemption, to potentially reduce or eliminate estate taxes on their own assets when they die.
A bypass trust can be an effective way to minimize estate taxes and ensure that assets are preserved for future generations. However, it is important to note that bypass trusts can be complex and may not be right for everyone. It is a good idea to consult with an estate planning attorney to determine if a bypass trust is appropriate for your situation.