A bypass trust is permitted as a legitimate tool to reduce the estate tax applied upon the death of a married couple. The trust is typically created as part of a complete estate plan, and includes provisions for the transfer of assets upon the death of each spouse. Generally, the terms of the trust allocate a portion of the property into “Trust A” and another portion into “Trust B”. A bypass trust receives property as specified in the trust document prepared by an attorney – it may receive all of the property of the first spouse that died, it may receive half of the property which was co-owned by the remaining spouse, or it may receive a value up to the equivalent of the unified tax credit (estate tax exclusion).
The use of the bypass trust can minimize the estate tax applied on the second death by generating the exclusion on the first death, and by creating an exclusion on the second death as well. The trust can also ensure that the assets will be disbursed according to the wishes of the first spouse to die, even if the remaining spouse remarries.
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