Bypass Trust

Trust Terms

A subtrust created at the first spouse's death that holds assets up to the federal estate tax exemption to keep them out of the surviving spouse's taxable estate.

A bypass trust is a planning tool used by married couples to preserve both spouses' federal estate tax exemptions. It is also known as a credit shelter trust, family trust, or B trust in an A-B trust plan.

How a Bypass Trust Works

When the first spouse dies, assets up to the federal estate tax exemption are funded into the bypass trust instead of passing outright to the surviving spouse. The survivor can receive income from the trust, plus principal for health, education, maintenance, and support. Because the survivor never owns the assets outright, they are not included in the survivor's estate at the second death.

Are Bypass Trusts Still Useful?

With federal exemptions above $13 million per person and portability available, many couples no longer need a mandatory bypass trust. Modern Arizona plans often use disclaimer trusts, which allow the surviving spouse to choose at the time of death whether to fund a bypass trust based on then-current tax law.