Bypass Trust
BYPASS TRUST
In the past, estate taxes would be saved by avoiding bunching property in the estate of one taxpayer. The idea
was to carve
out of a deceased spouse's estate the portion of the property exempt from tax. Placing this amount in a
maximum benefit bypass trust avoided this tax on the death of the surviving spouse while providing the spouse with money to
maintain the standard of living both spouses enjoyed together. Since the trust bypasses estate taxes, it is sometimes called a
"bypass trust." Other terms commonly used for this trust are the "exemption equivalent trust" and the "credit shelter trust." The
trust may continue for the benefit of any person (typically the settlors' children) following the surviving spouse's death. Finally,
the bypass trust can give the surviving spouse all the income, or distribution may be left to the discretion of the trustee.
For 2011 and 2012, the estate tax exemption amount has become "portable"
and the "bunching" effect has been eliminated. Nevertheless, there
may be good reasons to emply a bypass trust, and we don't know what the
future (2013 and beyond) has in store for us, so keeping a bypass trust
(or its equivalent disclaimer trust) in your estate plan may still be a
good idea.
