A Bypass Trust is a type of irrevocable trust that allows the grantor to directly or indirectly transfer assets for his or her benefit during his or her lifetime. It is used to avoid the federal estate tax known as "the death tax" in the United States. By being able to transfer assets during one's lifetime, Bypass Trusts may also protect against Medicaid spend-down requirements in order not to disqualify an individual for benefits. Bypass trusts are sometimes referred to as Credit Shelter Trusts or Bypass Annuity Trusts.
A Bypass Trust serves as a mechanism for transferring assets to the next generation without gift taxes and/or estate taxes. By using a Bypass Trust, assets may be placed into the trust and distributed to the beneficiaries of your choosing while avoiding estate taxes on both Federal and State levels. By transferring assets to this trust during your lifetime, you can retain control of those assets until death. This helps protect against incapacity issues that may arise later in life. The Bypass Trust can be funded with cash or it can also be funded with other assets such as real estate, securities, and insurance. Each Bypass Trust is drafted to best suit the wishes of the Grantor. The Bypass Trust will continue to exist even after death. This trust will provide a payment to the Bypass Trust Beneficiary if certain conditions are met. If the Bypass Trust Beneficiary dies, then the Bypass Trust Assets will pass on to their heirs or beneficiaries. The Bypass Trust can allow for flexibility in planning while minimizing gift and estate tax exposure. A Bypass Trust is irrevocable and therefore will last for the duration of the Bypass Trust Beneficiary's life. If, however, you want to end this trust at some point in time after the Bypass Trust Beneficiary has died then you must say that within your Bypass Trust Documents. If no end date is specified, the Bypass Trust will continue in perpetuity. The Bypass Trust Assets can include cash, real estate, securities, and insurance. In some cases, it may also include interests in private businesses or closely held corporations. By funding a Bypass Trust with non-marketable assets such as interests in private businesses or closely held corporations, transfer tax savings are maximized. The Bypass Trust Beneficiary is the person who will receive benefits from the Bypass Trust. They may be changed at any time during your life through Bypass Trust Amendments. You can even choose to distribute Bypass Trust Assets to Bypass Trust Beneficiaries in different amounts if you choose to do so. To amend your Bypass Trust, these things should be present: If you fail to hold these things present, then Bypass Trust Amendments may not be valid. If Bypass Trust Beneficiary becomes incapacitated or incompetent, then Bypass Trust can be amended to provide benefits to the Bypass Trust Representative until Bypass Trust Beneficiary is once again able to receive Bypass Trust benefits. There are Bypass Trust benefits and Bypass Trust disadvantages when compared to other estate planning options. The following are the things to consider before having a Bypass Trust: When Bypass Trusts are created during a lifetime, the Bypass Trust assets cannot be reclaimed by the Grantor. By creating Bypass Trusts for Bypass Trust Beneficiaries who you do not want to benefit from Bypass Trust Assets until a certain age, such as when Bypass Trust Beneficiary reaches the age of majority, those assets can be reclaimed by the Grantor. This Trust is used to avoid the federal estate tax known as "the death tax" in the United States.What Purpose Does a Bypass Trust Serve?
How Does Bypass Trust Work?
How Long Does a Bypass Trust Last?
What Are Bypass Trust Assets?
Who Are the Bypass Trust Beneficiaries?
Bypass Trust Amendment Process
Pros and Cons of Having a Bypass Trust
Pros
Cons
Bypass Trust Planning Tips
Key Takeaways
Bypass Trust FAQs
Bypass Trust is a method of avoiding federal estate taxes (more commonly known as the death tax).
You should consider having Bypass Trust when you want to provide for Bypass Trust Beneficiaries in a manner different from what is provided in your Will or Revocable Living Trust.
You should consider Bypass Trust Beneficiaries who will benefit from Bypass Trust Assets and who will not waste or underutilize Bypass Trust Assets.
You may want to consider Bypass Trust Assets that are likely to appreciate, such as Bypass Trust stock or Bypass Trust real estate.
Bypass Trust Beneficiaries can receive Bypass Trust cash, Bypass Trust real estate, or Bypass Trust stock.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.