The name describes the mechanism. Assets placed in this trust at the first death bypass the surviving spouse's estate. The survivor can receive income and, within limits, principal for health, education, maintenance and support, but because they do not own the assets outright, the trust is generally not taxed again when they die.
Historically this was the standard way for married couples to use both spouses' federal estate tax exemptions. Without it, the exemption of the first spouse to die was simply lost, and the entire combined estate was tested against one exemption at the second death.
Portability changed the calculation for many families. A surviving spouse can now generally elect to carry over the deceased spouse's unused federal exemption, which achieves a similar result with far less structure. That election has its own requirements and deadlines, and the exemption amount itself is subject to change under current law.
Bypass trusts still earn their place where estates are expected to appreciate significantly, where a blended family needs the remainder locked down, where creditor or remarriage protection matters, or where state estate tax rules make the federal portability answer incomplete. The choice now depends on circumstances rather than being automatic.
Frequently asked
- Is a bypass trust the same as a credit shelter trust?
- They are two names for the same structure, and you may also see it called a family trust or the B trust in an A-B plan. Bypass describes what it does, moving assets around the survivor's estate. Credit shelter describes why, sheltering the first spouse's estate tax credit. Attorneys use whichever term their drafting tradition favours, and nothing turns on the label.
- Does portability make bypass trusts obsolete?
- For many couples it removes the tax reason, but not the other reasons. Portability does not protect assets from a survivor's creditors, does not stop a survivor from redirecting the money to a new spouse or their children, and does not capture future appreciation outside the taxable estate. State-level estate taxes also do not always follow the federal portability rules. Whether it still helps you is a question for current, local advice.
- What is the cost basis catch?
- Assets in a bypass trust generally do not receive a second step-up in basis when the surviving spouse dies, because they were never in that spouse's estate. Assets left outright to the survivor typically do. For families no longer facing estate tax, this can mean the trust saves nothing and costs the heirs capital gains on decades of appreciation. It is the main argument for revisiting older A-B plans.