What is a Bypass Trust?
Please remember that this answer is provided in the spirit of public education, not as legal advice. If you require legal advice for a particular situation, you should consult an attorney. A bypass trust is a long-term planning device. If you leave property to someone in the form of a bypass trust, that property will not be subject to estate taxes when that person dies. (The property will still be taxed in your estate, however; to save tax in your own estate, other methods must be used.) A bypass trust is particularly useful for spouses who plan their estates together. By leaving property to each other in bypass trust form, they can guarantee that the property will only be taxed once between the two of them. To effectively save taxes, a bypass trust must follow certain rules laid out by the IRS. Let’s suppose your will sets up a bypass trust for your husband, and you die first. In order to keep the trust from being subject to estate tax when your husband dies, your will must place the
A Bypass Trust, sometimes called a Life Estate or A-B Trust, is a way for couples of combined estates of more than $2 million, in 2008, to be exempt from estate tax if one or the other dies. This amount, which is exempt from Federal Estate Tax, increases to $3.5 million in 2009 and then in 2010 there is no federal estate tax. However, in 2011 the Federal Estate Tax is returned to the 2002 level. As you can tell, the amount is unpredictable and the government will probably change this amount many times during our lifetime. A Bypass Trust is designed to let the $2 million tax exemption, or whatever amount it may be at the time of the first death, be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent’s estate free of estate tax. The surviving spouse never legally owns the property within the Bypass Trust because it is legally owned by the Trust, but the surviving spouse can use the assets and property within the Trust estate. However,
