What is a Bypass Trust?

Taxes2A bypass trust is a long-term asset transfer planning device. If you leave property to someone in the form of a bypass trust, the property in the trust will be subject to estate taxes when you die, but will not be subject to estate taxes when the trust beneficiary dies. Bypass trusts are most often used by spouses who plan their estates together, particularly when the couples’ assets, divided by the two of them, do not exceed the federal estate tax exclusion amount ($5.25 million in 2013), but exceed the exclusion if everything is owned by the surviving spouse.

Leaving property to each other in bypass trust form means the property will only be subject to estate taxes when the first of them dies.

The IRS requires bypass trusts to follow strict rules to properly shelter assets from estate taxes when the beneficiary dies:

  1. You must limit the beneficiary’s power to access the trust during his or her lifetime. The beneficiary can, however, request disbursements for health, education, maintenance and support, along with up to $5,000 or 5 percent of the principal per year, whichever is greater. The beneficiary may received the income from the trust and can even serve as the trustee.
  2. You must limit your beneficiary’s power to distribute trust assets when he or she dies. You must either designate a successor beneficiary, or the beneficiary can choose one or more successor beneficiaries. A beneficiary can’t withdraw the principal or dissolve the trust.

A bypass trust must be carefully drafted to comply with specific IRS language requirements, so be sure to seek the advice of an experienced estate planning attorney to make sure your bypass trust is airtight.

For more information about a bypass trust or any other estate planning need, call an experienced will and trusts lawyer at the Peterson Law Group.  Our experienced Conroe, Texas attorneys help clients develop comprehensive estate plans. Call us at 936-337-4681 or 979-703-7014 or contact us online to arrange an appointment.

About Chris Peterson

Chris Peterson is an attorney and the owner and founder of Peterson Law Group, a Texas law firm with offices in Bryan/College Station and Kingwood. He mainly practices in the areas of Estate Planning and Business Planning. Chris is also a Certified Estate Planner. Besides his law practice, Chris is a serial entrepreneur and community volunteer. He is known for his cutting edge law practice that utilizes technology to deliver efficient, excellent work.