Bypass Trust (Credit Shelter Trust)

Why Bypass Trusts Exist

The federal estate tax marital deduction allows unlimited transfers to a surviving spouse with no estate tax. But this deduction only defers the tax — when the surviving spouse eventually dies, only their own exemption shelters the combined estate.

A bypass trust solves this by diverting assets at the first death into an irrevocable trust rather than outright to the surviving spouse. Those assets are permanently outside the survivor's estate.

How It Works

1. First spouse dies. The estate is split: assets up to the exemption amount go into the bypass trust; the remainder may go to a marital trust or outright to the surviving spouse.
2. The bypass trust assets are managed for the surviving spouse's benefit (income, and often principal access for health/education/support needs), but are not part of the survivor's estate.
3. At the survivor's death, bypass trust assets pass to children (or other beneficiaries) estate-tax-free.

Bypass Trust vs. Portability

Portability is simpler but does not lock in the current exemption amount. A bypass trust permanently shelters the assets — which is especially valuable if exemptions decrease (as the 2025 sunset may cause). However, bypass trust assets may not receive a full stepped-up basis at the second death, which is a tradeoff to evaluate with a tax advisor.