What Is a Bypass Trust?

Creating an estate plan is an essential part of managing wealth. This is especially true, if you’re married and want to leave assets to your spouse. Understanding how a bypass trust works will help your planning, says KAKE.com’s recent article, “How a Bypass Trust Works in an Estate Plan.”

A bypass trust, or AB trust, is a legal vehicle that permits married couples to avoid estate tax on certain assets, when one spouse dies. When that happens, the estate’s assets are split into two separate trusts. The first part is the marital trust, or “A” trust, and the other is a bypass, family or “B” trust. The marital trust is a revocable trust that belongs to the surviving spouse. A revocable trust has terms that can be changed by the individual who created it. The family or “B” trust is irrevocable, meaning its terms can’t be changed.

When the first spouse dies, his or her share of the estate goes into the family or B trust. The surviving spouse doesn’t own those assets but can access the trust during their lifetime and receive income from it. The part of the estate that doesn’t go into the B trust, is placed into the A or marital trust. The surviving spouse has total control over this part of the trust. In addition, the surviving spouse can be the trustee of a bypass trust or designate another person as the trustee. It is the trustee’s task to make sure that assets from the couple’s estate are divided appropriately into each part of the trust. The trustee also coordinates asset management, as instructed by the trust.

This type of trust can minimize estate taxes for married couples who have significant wealth. For the family or B part of the trust, assets up to an annual exemption limit aren’t subject to federal, or more importantly, Massachusetts estate tax. In 2019, the limit is $11.4 million or $22.8 million for married couples. If assets in the B trust don’t exceed that amount, they wouldn’t be subject to federal estate tax. In Massachusetts, the limit is $1 million. Given the high value of real estate in Massachusetts, the probability of being subject to Massachusetts estate tax, and thus the need to do some estate tax planning, is high. By creating the AB trust in your plan, you minimize estate taxes due to the Commonwealth on the surviving spouse’s death and thereby ensure a legacy for your children and grandchildren.

Holding assets in a bypass trust lets the surviving spouse avoid probate. Any assets held in a bypass or other type of trust aren’t subject to probate.

Work with an estate planning attorney to create a bypass trust. A bypass trust for your estate plan will depend on the value of your estate, as well as the amount of estate tax you want your spouse or heirs to pay when you die.

Reference: KAKE.com (August 13, 2019) “How a Bypass Trust Works in an Estate Plan”