Understanding How a Bypass Trust Works in Estate Planning
Estate planning tools include many different types of trusts, each of which provides benefits in specific circumstances. A specialized trust arrangement referred to as a bypass trust may be used by high-net-worth families to transfer assets across generations while minimizing federal estate and gift tax, providing for a surviving spouse, and protecting legacy assets for beneficiaries like children and grandchildren. A bypass trust strategy is also referred to as an AB trust or credit shelter trust.
Structure of a Bypass Trust
A bypass trust is established on the death of the first spouse by dividing the estate assets into two trusts. The first trust is called the marital trust, A trust, or survivor’s trust. The second part is the bypass trust, B trust, family trust, or credit shelter trust. The marital trust contains assets that pass directly to the surviving spouse. The bypass trust, in contrast, contains assets that will pass to other beneficiaries, usually the decedent’s children. The surviving spouse typically receives only income from the bypass trust during their lifetime, but may also receive distributions of principal for limited purposes such as health, education, and maintenance, depending on the terms of the bypass trust document. The assets in the bypass trust pass to the beneficiaries on the surviving spouse’s death, without being subject to estate taxes.
The bypass trust is funded with an amount of assets equal to the maximum of the deceased spouse’s federal estate tax exemption (explained below), so it is exempt from estate tax. The marital trust is funded with the balance of the estate assets, and is not subject to the estate tax because of the unlimited estate tax marital deduction provided by the Internal Revenue Code. The goal of the strategy is to make full use of the estate and gift tax exemption for each spouse. Assets in the marital trust are included in the surviving spouse’s estate on their death.
Federal Estate and Gift Tax Exemption Update
For 2025, the annual federal estate and gift tax exemption is $13.99 million for individuals and $27.98 for married couples. The One Big Beautiful Bill Act, signed into law on July 4, 2025, increases the exemption for 2026 to $15 million for individuals and $30 million for married couples. Thereafter, the law provides for the exemption to be indexed for inflation beginning in 2027. These provisions in the new law avoided sunset of the higher estate tax amounts on January 1, 2026, which would have occurred if Congress had not enacted the new provisions.
Adoption of the new provisions retained the portability rule, which allows a surviving spouse to apply any unused portion of a deceased spouse’s individual federal estate and gift tax exemption to the surviving spouse’s own estate, thereby increasing the surviving spouse’s federal estate tax exemption and reducing the tax liability of the surviving spouse’s estate if the value of the estate exceeds the individual exemption.
Potential Benefits of a Bypass Trust
Whether married spouses may benefit from including a bypass trust in their estate plans depends entirely on their financial and family circumstances. Making the decision about a bypass trust requires complex legal and tax analysis and assistance from an experienced estate planning attorney. In some cases, other advanced estate planning strategies, including portability, may also be utilized to protect the estate assets from taxes. Advance planning is essential to maximize asset protection and minimize taxes through available options and alternatives.
For high-net-worth married couples, a bypass trust strategy may be an option worth considering to enable the spouses to avoid federal estate taxes, provide for the surviving spouse, and accomplish other specific goals. Depending on the terms of the trust documents, using a bypass trust may also protect assets from creditors and legal actions. Finally, a bypass trust structure may protect a family legacy from potential future spouses if the surviving spouse remarries.
A bypass trust may have drawbacks as well as benefits that should be considered in reaching a decision. Married spouses with substantial assets must consider a wide range of circumstances in making key estate planning decisions, such as whether to use specialized tools like a bypass trust. Getting assistance from a knowledgeable estate planning lawyer is essential before making any decisions.
Contact an Experienced Georgia Estate Planning Attorney
At Asset Protection & Elder Law of Georgia, we help clients make sound estate planning decisions. Call us at (770) 282-7952 or use our online form to talk with us.