A bypass trust, also known as a credit shelter trust or an AB trust, is a powerful estate planning tool designed to accomplish exactly that: providing for a surviving spouse while simultaneously ensuring assets eventually pass to children or other designated beneficiaries. This is particularly relevant given the current federal estate tax exemption, which, while high at $13.61 million per individual in 2024, is subject to change and could impact more estates in the future. The core concept revolves around utilizing the estate tax exemption amount to shield assets from estate taxes while still providing income and potentially principal to the surviving spouse. It’s a balancing act between present needs and future inheritance goals, and when structured correctly, it can provide significant benefits.
What are the key components of a bypass trust?
The trust is typically divided into two components: the marital trust (or “A” trust) and the bypass trust (or “B” trust). The marital trust receives assets up to the estate tax exemption amount, and the surviving spouse has the right to income from this trust, and potentially principal for their health, education, maintenance, and support. The bypass trust, funded with the remainder of the estate up to the exemption amount, is designed to remain separate and avoid estate taxes when the surviving spouse dies. According to a recent study by the National Association of Estate Planners, approximately 55% of high-net-worth families utilize some form of trust to manage their wealth and minimize estate taxes. This illustrates the growing recognition of the importance of proactive estate planning. The benefit of this is that the assets in the bypass trust grow outside of the surviving spouse’s estate, avoiding future estate taxes when they eventually pass those assets to the next generation.
How does a bypass trust work in practice?
Let’s consider the case of Eleanor and George. George, a successful architect, and Eleanor, a retired professor, had accumulated a substantial estate. They feared that if something happened to George first, their assets would be subject to estate taxes, significantly diminishing the inheritance for their children, Daniel and Clara. They worked with Ted, an estate planning attorney, to create a bypass trust. Upon George’s passing, the trust was funded as planned, with a portion allocated to the marital trust for Eleanor’s lifetime support and the remainder to the bypass trust for the benefit of Daniel and Clara. Eleanor received income from the marital trust, allowing her to maintain her lifestyle without touching the principal intended for the children.
What happens when things *don’t* go as planned?
I remember working with a client, Mr. Henderson, who thought he could “DIY” his estate plan. He created a trust document online, believing it was sufficient. He hadn’t considered the complexities of funding the trust properly. Unfortunately, when he passed away, a significant portion of his assets remained in his individual name, subject to estate taxes. The family was devastated, not only by their loss but also by the substantial tax burden. They were forced to sell their family home to cover the taxes, something that could have been avoided with proper planning and professional guidance. This highlighted the critical importance of not only *creating* a trust but also *funding* it correctly, and seeking guidance from a qualified estate planning attorney. Roughly 60% of Americans do not have an updated will or trust, leaving their families vulnerable to similar challenges.
How can a properly structured bypass trust provide peace of mind?
Fortunately, after Mr. Henderson’s story, another client, Mrs. Albright, came to Ted seeking a comprehensive estate plan. She had a similar concern about protecting her assets for her children while ensuring her husband was well-cared for. Ted crafted a bypass trust tailored to her specific needs, carefully outlining the terms for both the marital and bypass trusts. He also worked with her to properly fund the trust, transferring ownership of her assets into the trust’s name. Years later, when she passed away, the trust worked flawlessly. Her husband received a comfortable income stream, and her children were guaranteed an inheritance, free from estate taxes. It was a beautiful outcome, and a testament to the power of thoughtful estate planning. By following best practices and working with a qualified professional, Mrs. Albright had secured her family’s financial future and achieved lasting peace of mind. A properly funded bypass trust, like Mrs. Albright’s, can provide a lasting legacy for generations to come.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, a trust lawyer near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
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