What is a bypass trust and how does it work?

Bypass trust provisions allow a married couple to fully utilize the amount exempt from estate taxes in both spouses’ estates instead of only the surviving spouse’s estate. For example, David and Martha, American citizens who own assets worth $4,000,000, sign simple wills that leave everything to the surviving spouse. David dies in 2020.

Does a bypass trust avoid inheritance tax?

A bypass trust also doesn’t guarantee exemption from state estate tax is always avoidable. Depending state laws, it’s possible that you or your spouse may still owe estate tax at the state level on assets received when either of you passes away.

Can a surviving spouse be a trustee of a bypass trust?

Although a surviving spouse may want the security of knowing that he or she controls the trust assets as the trustee, the surviving spouse must respect the bypass trust as a separate entity. The trustee cannot commingle the trust assets with the surviving spouse’s assets.

Do I need an attorney to establish a bypass trust?

Assets held in a bypass or other type of trust aren’t subject to probate. Establishing a bypass trust can be costly and time-consuming. An estate planning attorney who specializes in this type of trust is typically essential to the process. If you don’t have extensive assets, estate tax benefits may justify the cost of creating the trust.

Additionally, holding assets in a bypass trust allows the surviving spouse to avoid probate. That is the legal process overseen by the court system in which a deceased person’s assets are inventoried. It also pays creditors and distributes assets to heirs. Assets held in a bypass or other type of trust aren’t subject to probate.

How is property held in a living trust disposted?

The dispostion of property held in a living trust is controlled by the terms of the trust instrument, whether a declaration of trust or a trust agreement. It is not controlled by your will, it is not controlled by the intestacy laws of the state in which you are domiciled, and it does not become a part of your probate estate.

The surviving spouse may act as trustee of a bypass trust or name someone else trustee. It’s the trustee’s responsibility to ensure that assets from the couple’s estate are divided appropriately into each part of the trust. The trustee also oversees asset management, as outlined by the terms of the trust.

What are the legal requirements for setting up a trust?

This requirement is rather straightforward – the trust must be legally formed under state law.