A “bypass trust” is a common estate planning tool that has traditionally been used as a way to shelter assets from the federal estate tax for the benefit of a married couple’s heirs. A bypass trust (also sometimes referred to as a “family trust,” “credit shelter trust” or “nonmarital trust”), which is created at the death of the first spouse to die under a will or revocable trust, is funded with the amount of assets from a decedent’s estate that is exempt from the federal estate tax. Under current law, the federal estate tax exemption amount (also known as the “unified credit exemption equivalent” or “applicable exclusion amount”) is $5.45 million, so that assets equal in value to up to that amount in a decedent’s estate can be used to fund the bypass trust, and those assets would not be subject to the federal estate tax (currently a 40 percent tax) in the decedent’s estate.
The mere utilization of a bypass trust is not what causes assets to escape the federal estate tax. If the same amount of assets would instead be left outright to a decedent’s heirs, there would still not be any federal estate tax in the decedent’s estate on assets up to the $5.45 million exemption amount. The reason the trust serves as a so called credit-shelter is because of the ability to set aside assets for the benefit of the surviving spouse, but shelter them from being added to the surviving spouse’s taxable estate at death.
