Bypass Trusts refer to a type of trust established to minimize estate taxes for a surviving spouse and their heirs.
A bypass trust, also known as a credit shelter trust, is typically created by one spouse upon their death. The trust holds a portion of the deceased spouse’s estate, up to the estate tax exemption limit, allowing the surviving spouse to benefit from the income generated by the trust while keeping the principal amount outside of their taxable estate.
For example, if the estate tax exemption is $11.7 million, the deceased spouse can place that amount in a bypass trust. This allows the surviving spouse to receive income from the trust during their lifetime, but when they pass away, the trust assets do not get included in their estate, effectively bypassing the estate taxes that would otherwise apply.
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