Bypass Trust


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.

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 The person who creates the trust specifies how much money can be withdrawn and for what purpose.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.

  1. Credit Shelter Trust - CST

    A type of trust that allows a married investor to avoid estate ...
  2. Grantor

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  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. Qualified Terminable Interest Property ...

    A type of trust that enables the grantor to provide for a surviving ...
  6. Trustee

    A person or firm that holds or administers property or assets ...
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