Bypass Trust

AAA

DEFINITION of 'Bypass Trust'

An estate-planning device used to pass down assets after death without subjecting them to the estate tax. A bypass trust is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. It is structured so the children will not have to pay estate taxes on those assets in excess of the current estate tax exemption.

INVESTOPEDIA EXPLAINS 'Bypass Trust'

One condition of a bypass trust is that the recipient must have restricted rights to withdraw principal. The person who creates the trust specifies how much money can be withdrawn and for what purpose. The grantor also limits the recipient's ability to distribute trust assets upon his or her death by providing guidelines for how those assets will be distributed. Bypass trusts should be prepared by a lawyer because the IRS will not honor them if they are not prepared properly. An improperly constructed bypass trust can cost the heirs thousands if not hundreds of thousands or millions of dollars in estate taxes.

Also known as a credit shelter trust.

RELATED TERMS
  1. Estate Tax

    A tax levied on an heir's inherited portion of an estate if the ...
  2. Grantor

    1. A seller of either call or put options who profits from the ...
  3. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  4. Revocable Trust

    A trust whereby provisions can be altered or canceled dependent ...
  5. Trustee

    A person or firm that holds or administers property or assets ...
  6. Qualified Terminable Interest Property ...

    A type of trust that enables the grantor to provide for a surviving ...
RELATED FAQS
  1. What are the restrictions for naming a given individual as my contingent beneficiary?

    Life insurance is an important part of estate planning. It allows you to ensure that you can financially take care of the ... Read Full Answer >>
  2. What debt/equity ratio is typical for companies in the insurance sector?

    The debt-to-equity ratio is calculated by dividing total liabilities by total equity, and it is used to measure leverage. ... Read Full Answer >>
  3. How does the risk of investing in the insurance sector compare to the broader market?

    Due to economic, demographic and interest rate trends, there is less risk when investing in the insurance sector compared ... Read Full Answer >>
  4. What is the main business model for insurance companies?

    Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves ... Read Full Answer >>
  5. Does Manchester United (MANU) own Old Trafford stadium?

    Old Trafford Stadium was built for and is currently still owned by Manchester United Football Club (Man Utd.). This means ... Read Full Answer >>
  6. Which insurance companies pay the highest dividends?

    For income investors, finding companies that pay above-average dividends consistently is key to creating and sustaining a ... Read Full Answer >>
Related Articles
  1. Retirement

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  3. Retirement

    Get A Step Up With Credit Shelter Trusts

    Don't let unexpected taxes eat away at your inheritance or burden your heirs.
  4. Taxes

    Top Tax Issues For High-Net-Worth Individuals

    Wealth brings benefits, but from a tax perspective it creates special challenges. Here are some tax issues to pay attention to.
  5. Professionals

    Indexed Universal Life Policies: Watch These Risks

    By properly vetting indexed universal life policies, advisors and savers can avoid contracts that could prove overly costly over the long run.
  6. Professionals

    5 Estate Planning Must-Dos Before Saying "I Do"

    There are many exciting things to look forward to when a couple gets married; not among them is putting financial affairs in order. Advisors can help.
  7. Insurance

    India's Two-Child Policy

    As of 2014, 11 Indian states have passed laws to restrict Indian citizens from having no more than two children.
  8. Personal Finance

    Which Estate Transfer Technique is Right for You?

    This article explains the difference between the two estate transfer methods -- a will and a trust, and the circumstances under which each can be used.
  9. Professionals

    Estate Planning and Elderly and Passed Clients

    By keeping up with new estate tax rules, financial advisors can help elderly clients save big on tax costs.
  10. Professionals

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center