What Is a Bypass Trust? How It Works in an Estate Plan

A bypass trust is an estate planning tool for married couples in which a spouse’s share of the estate transfers to a trust at death. The surviving spouse may get income from and use the trust assets; however, the trust’s beneficiaries inherit the assets when that spouse dies.

Though originally intended to minimize estate taxes, today people often use bypass trusts to shield assets from specific people due to tax law changes.

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To create a bypass trust, each spouse includes a provision in their will that creates a trust for the surviving spouse’s benefit and funds that trust with an amount up to the estate tax exemption. When the surviving spouse later dies, whatever is left in that trust at that point typically goes to the first spouse's designated beneficiaries. 

The assets typically move to the surviving spouse free from estate tax through the trust. When the surviving spouse dies, they then pass to the beneficiaries, free from estate tax.

Estate tax is a tax levied on a deceased person's assets over a certain amount. The federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $13.61 million in 2024 or $13.99 million in 2025. That exemption is per person.

Bypass trusts were often helpful in minimizing federal estate taxes. However, in 2010, federal estate tax laws began allowing “portability” of the estate tax exemption, meaning a spouse could “inherit” the unused portion of the other spouse’s estate tax exemption. This is called the deceased spousal unused exclusion amount, or DSUE. ^[0]

However, bypass trusts do have other uses.

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• Minimize state-level estate taxes. Most people probably don’t have estates large enough to trigger federal estate tax, but they may owe considerable estate taxes to the state. That’s because some states have their own estate taxes, and the exemption thresholds can be far lower than the federal threshold. In those cases, a bypass trust might help minimize state-level estate taxes. ^[0]

  American Bar Association. A-B trust planning. Accessed Feb 23, 2023.

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• Keep the decedent’s assets away from someone else’s creditors. If the surviving spouse remarries someone with a lot of debt, creditors may come after the surviving spouse’s assets if the new partner falls behind on the payments. A bypass trust could shield those assets from creditors. Bypass trusts are sometimes called credit shelter trusts.

• Ensure the kids actually get the assets. If the surviving spouse remarries someone who has kids from another relationship, those children might receive the decedent’s assets as part of their inheritance when the surviving spouse dies. A bypass trust can arrange for the assets to go only to the decedent’s own children even if the surviving spouse remarries.

• Time and expense. Creating a bypass trust typically requires paying an estate planning attorney to handle the paperwork. That can cost hundreds or thousands of dollars and involve one or more appointments with the attorney.