Bypass Trust

What is a '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.

BREAKING DOWN '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 The person who creates the trust specifies how much money can be withdrawn and for what purpose.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. Trust Fund

    A trust fund is a fund comprised of a variety of assets intended ...
  2. Naked Trust

    A straightforward type of trust into which a trustor transfers ...
  3. Beneficiary Of Trust

    A beneficiary of trust is a person for whom a trust was created, ...
  4. Pour-Over Will

    A will established by an individual who has already taken the ...
  5. Trust Property

    Assets that have been placed into a fiduciary relationship between ...
  6. Alimony Substitution Trust

    A trust agreement in which a divorced person agrees to pay spousal ...
Related Articles
  1. Retirement

    Surprising Ways a Trust Could Help Your Family

    Everything you always wanted to know about setting up trusts, in handy glossary form.
  2. Managing Wealth

    Estate Planning: Marital And Non-Marital Trusts

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) Before we begin talking about these types of trusts, let's first begin by introducing the term "unlimited marital deduction." ...
  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. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  5. Managing Wealth

    Estate Planning: Introduction To Trusts

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) A trust is an agreement that describes how assets will be managed and held for the benefit of another person. There are many ...
  6. Managing Wealth

    Surprising Uses for Trust Funds

    Here are five common situations where a trust fund makes financial sense.
  7. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  8. Financial Advisor

    How Trust Funds Can Safeguard Your Children

    Certain types of trust funds can help to protect your assets from bankruptcies and civil actions, and can be established to safeguard your children and designated beneficiaries.
  9. Managing Wealth

    Advanced Estate Planning: Using Trusts

    By Steven Merkel While making a will is one of the most important documents in estate planning, there are typically always a few items, property, or accounts that while they're included in your ...
  10. Financial Advisor

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
RELATED FAQS
  1. What percentage of withdrawals from a trust fund is taxed?

    I have inherited a trust fund. This is the first time I have considered pulling money from the account.  ... Read Answer >>
  2. Will I have to pay taxes every year when I receive the $25,000 from my trust fund?

    My inheritance is in the form of a trust fund that distributes $25,000 per year for 10 years. ... Read Answer >>
  3. What is the difference between an intervivos trust and a testamentary trust?

    Understand the differences between a testamentary trust and an inter-vivos (living) trust, and learn why each is important ... Read Answer >>
  4. What happens when a will and a revocable trust conflict?

    Learn why a revocable trust supersedes a will, but only for the assets held in the trust, when there is a conflict between ... Read Answer >>
  5. How does a revocable trust become a split-interest trust?

    Learn how a revocable trust becomes a split-interest trust upon the death of the of the grantor when there are both charitable ... Read Answer >>
  6. How can a trust lower federal transfer tax liability?

    A trust is an arrangement in which an individual or entity controls property or funds on behalf of someone else without actually ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center