What Is A Bypass Trust?

A married couple may use a bypass trust to protect their assets and to preserve the federal and state estate tax exemptions. Upon the death of the first spouse, the deceased spouse’s assets are placed in two separate trust funds – Trust A (marital trust) and Trust B (bypass trust). Trust A is a revocable trust and is for the exclusive use of the surviving spouse. No taxes are owed in Trust A because funds placed there are always below the federal and state estate tax exemption amounts. Trust B is an irrevocable trust and is funded with the full federal or state estate tax exemption amount. The surviving spouse may dispose of any remaining funds in Trust A as he or she wishes and the funds in Trust B will pass estate tax free to the chosen trust beneficiaries.