Bypass Trusts

A bypass trust is a long-term planning device; it is a tool for spouses who plan their estates together.  Bypass trusts are a legal method of circumventing gift tax that also allow for a married couple to minimize taxation of assets upon death.  How do bypass trusts work?  By leaving property to each other in bypass trust form, a married couple can guarantee that their assets will only be taxed once between the two of them.

Bypass trusts are most often designed to be part of an A/B Trust, after the death of the first spouse to die.  During the estate-planning process while both spouses are alive, a married couple would transfer title of their assets into their trust.  Upon the death of the first party to die, a certain percentage of assets would then be transferred into “Trust A,” while the remaining percentage would be allocated to “Trust B.”

“Trust A” would then contain assets specifically designed to remain accessible to the surviving spouse during their lifetime; this would allow the surviving spouse to have enough money to take care of their needs for the rest of their life.

“Trust B” would be allocated the remaining percentage of assets—as I mentioned before—but the “B Trust” must be funded in such a way that its assets are inaccessible by the surviving spouse for the duration of their lifetime.  For that reason, obviously, the “A Trust” would have to be amply funded to provide for the surviving spouse come any eventuality.

The “Trust B” is created with the sole purpose of passing on assets to beneficiaries beyond the two spouses, and to do so upon the death of the remaining spouse.   The “B Trust” is, in its simplest form, simply a tool that allows a married couple to protect their assets from the ultimate beneficiaries in such a way that the death tax and gift taxes are minimized.

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