What Is a Bypass Trust? How It Works in an Estate Plan
A bypass trust can help ensure that your assets end up where you want them to go after you die.
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What is a bypass trust?
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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How a bypass trust works
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.
Estate tax is a tax levied on a deceased person's assets over a certain amount. The federal estate tax ranges from 18% to 40% and generally only applies to assets over $13.99 million in 2025 or $15 million in 2026. That exemption is per person.
When the first spouse dies, the income from the assets in the bypass trust goes to the surviving spouse to provide for their needs. Typically the surviving spouse cannot access the principal.
When the surviving spouse later dies, the assets in the trust go to the first spouse's designated beneficiaries, free from estate tax.
Pros and cons of a bypass trust
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. This change meant that surviving spouses could end up with significantly larger estate tax exemptions, which, combined with increases in the size of the federal estate tax exemption itself over time, have rendered bypass trusts relatively less effective for managing federal estate taxes.
However, bypass trusts do have other uses.
Pros
May reduce estate taxes.
Can shield assets from creditors.
Ensures assets transfer as desired.
Cons
Complexity.
Potential capital gains taxes.
Advantages of a bypass trust
- 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.
- 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.
Disadvantages of a bypass trust
- 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.
- Potentially higher capital gains tax for your beneficiaries. People who inherit financial assets often sell them later, and if they sell them at a profit, they may owe capital gains tax. Typically, the IRS views the original cost of those assets (the cost basis) as the market value of those assets on the day the person inherited them (rather than what the decedent originally paid for them). This “step-up in basis” makes the profit from a sale of those assets look smaller to the Internal Revenue Service and thus can shrink the potential capital gains tax. However, assets inherited from bypass trusts don’t get a step-up in basis, so beneficiaries might pay more capital gains tax than if they had inherited the assets from outside the trust.
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- 1. Internal Revenue Service. Rev. Proc. 2022-32. Accessed Oct 3, 2025.
- 2. American Bar Association. A-B trust planning. Accessed Oct 3, 2025.
- 3. Pennsylvania Institute of Certified Public Accountants. CPA Now. Accessed Oct 3, 2025.
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