What Is a Bypass Trust, and Do I Need One? | New Haven County Trust Attorneys

• By Franklin Drazen
• |
• Posted October 28, 2022

For many decades, wealthy families relied on bypass trusts as critical aspects of their estate plans. However, in recent years, New Haven County trust attorneys have seen a shift away from the use of this type of trust. This is mainly due to the increase in gift and estate tax exemptions, as well as what is known as the “portability” provision in estate taxation. Nevertheless, bypass trusts may still be a worthwhile technique for some people to explore according to our estate and trust planning attorneys.

Bypass Trusts Explained

The mechanism of a bypass trust can be found in the name itself. It is a trust that is designed to let your assets bypass the estate of your spouse before your younger heirs (children and grandchildren) inherit the property. It can allow married couples to transfer millions of dollars while being shielded from federal estate taxes.

The way this works is usually as follows: each spouse will include a provision in their will that establishes a trust, naming the other spouse as the beneficiary. The trust is funded with the equivalent of the basic exemption amount of the first spouse to die. Upon the death of the surviving spouse, the assets that remain are transferred to the designated beneficiaries. If the trust has been structured in the optimal manner, the arrangement may avoid estate tax because it has utilized the full estate tax exemptions of both spouses.

Why Bypass Trusts Are in Less Frequent Use

For the last couple of decades, the exemption amount has seen a significant increase. It is currently $12.06 million for an individual’s estate and will continue to rise in line with inflation each year through 2025. Furthermore, the portability provision that was created in 2010 means that any portion of an exemption that the deceased spouse does not use becomes available to the estate of the surviving spouse. As a result, a couple can now transfer double the exemption amount to their non-spousal beneficiaries without paying estate taxes.

For these reasons, bypass trusts have not been used as frequently in recent decades. Nevertheless, they still have benefits that may enhance your estate plans. As part of our estate and trust planning services, we can help you determine if a bypass trust should be part of your financial planning.

Benefits of Bypass Trusts

Among the reasons a bypass trust might still be worth considering are the following:

• Protection from creditors - Any assets your surviving spouse inherits will still be available to creditors. A bypass trust can offer you protection from this outcome.
• Safeguarding assets if your spouse remarries - If your spouse gets married again after you die, your children’s fair share of an inheritance may be less clear-cut upon the death of your surviving spouse. A bypass trust can ensure that the assets pass to your children and grandchildren even if your spouse does remarry.
• Spendthrift provision - You can include a spendthrift provision in a bypass trust, which can allow your children to use the assets in a reasonable manner while guarding against reckless spending.
• Flexibility - You can use a bypass trust to give your surviving spouse legal authority to use trust assets only for certain costs, such as healthcare or education.

Contact a New Haven County Trust Attorney

Bypass trusts still offer plenty of opportunities for those who are planning their estate, especially in combination with other techniques. Contact our New Haven County trust attorneys at 203-877-7511 if you would like to find out more about how a bypass trust could be a useful addition to your estate plan.