Planning for the future, especially when it comes to your legacy, can feel overwhelming. With so many tools and strategies available, it's important to understand which ones truly fit your goals. One such tool, often discussed in estate and tax planning, is the Bypass Trust (also known as a Credit Shelter Trust or A/B Trust).

In this article, we'll walk you through what a Bypass Trust is, why it was created, how it works today, and whether it might still make sense for your estate plan.

What Is a Bypass Trust?

A Bypass Trust is a legal structure designed to help married couples reduce estate taxes and protect assets for their heirs. When one spouse passes away, the couple's assets are typically split into two parts:

  • Survivor's Trust (Trust A) - This holds the surviving spouse's share and remains flexible.
  • Bypass Trust (Trust B) - This holds the deceased spouse's share and becomes irrevocable, meaning its terms can't be changed.


This setup ensures that the deceased spouse's assets are preserved and managed according to their wishes, while also potentially reducing estate taxes.

Why Were Bypass Trusts So Popular?

In the past, the primary reason for including Bypass Trust provisions in a joint living trust was to avoid estate taxes. The estate tax exemptions from 1997 to 2009 were much lower, ranging from $600,000 to $3.5 million. Basically, each person has an estate tax exemption, giving married couples two exemptions. A Bypass Trust allowed couples to "capture" the deceased spouse's estate tax exemption, which would otherwise be lost if their share was simply gifted outright to the survivor's trust. Essentially, couples used Bypass Trusts to make sure they didn't "lose" one spouse's exemption, which could result in a higher tax bill for their heirs.

But things have changed. The federal estate tax exemption per person has increased significantly over the years:

  • 1997 - 2009: $ 600,000 - $3.5 million
  • 2010: $ 5 million
  • 2018: $11.18 million
  • 2025: $13.99 million
  • 2026 and beyond: $15 million, thanks to the recently enacted One Big Beautiful Bill Act


For most families, this means estate taxes are no longer a major concern—at least at the federal level.

So, Do Bypass Trusts Still Matter?

Yes, depending on your situation. While they're no longer essential for avoiding federal estate taxes for most people, Bypass Trusts still offer several benefits:

  • Tax Efficiency for Larger Estates: For high-net-worth families, they help preserve both spouses' exemptions, which in turn, preserves wealth for future generations.
  • Protection Against Appreciation: Any appreciation in the Bypass Trust isn't taxed in the surviving spouse's estate. Assets placed in a Bypass Trust are "locked in" at their value at the first spouse's death. Any subsequent growth or appreciation of these assets occurs outside the surviving spouse's estate, thus avoiding estate taxes at the second death.
  • Creditor Protection: Assets in the trust are generally shielded from lawsuits, creditors, or future spouses. This is particularly valuable in cases of remarriage or blended families, where the deceased spouse may wish to ensure their children receive a specific inheritance.
  • Control Over Inheritance: The irrevocable nature of the Bypass Trust ensures your wishes are followed, even if your spouse remarries or changes their plans.
  • State Estate Tax Planning: Some states have "decoupled" from the federal estate tax system, imposing their own estate or inheritance taxes with much lower exemption amounts that are often not portable. A Bypass Trust can be funded with the state exemption amount at the first death, allowing each spouse to utilize their state exclusion and reduce the overall state tax burden for the family.
  • Generation-Skipping Tax Benefits: The GST tax exemption, which prevents assets from being taxed multiple times as they pass through generations, is not portable. A Bypass Trust can be structured to utilize the deceased spouse's GST exemption, ensuring these assets bypass the estates of intermediate generations (e.g., children) and pass directly to "skip persons" (e.g., grandchildren) without additional GST tax.



What Should You Watch Out For?

Bypass Trusts aren't perfect for everyone. Here are a few things to consider:

  • No Second Step-Up in Basis: Assets in the trust don't get a second step-up in value when the surviving spouse dies, which could mean more capital gains taxes for your heirs.
  • Irrevocability: Once funded, the Bypass Trust's terms are generally fixed and cannot be altered by the surviving spouse, which can reduce flexibility.
  • Ongoing Costs: These trusts require separate tax filings and administrative work.
  • Funding Mistakes: If assets aren't properly allocated, the trust may not work as intended. Failing to properly allocate assets between the A and B trusts or neglecting to review and update trust provisions as tax laws change can lead to unintended tax consequences.
  • Portability Issues: If the executor doesn't file the Form 706 to elect portability, or in some cases, if the executor (who might be a stepchild in a blended family) refuses to incur the expense of filing the Form 706 to elect portability, the surviving family could lose valuable tax benefits.



A Flexible Alternative: The Disclaimer Trust

In some instances, a disclaimer trust provision in a married couples' living trust might be a better fit. This provision allows the deceased spouse's share to go to the survivor's trust by default. It still gives the surviving spouse the option to disclaim some or all the deceased spouse's share, which would then be allocated to a Bypass Trust or a Qualified Terminable Interest Property (QTIP) trust. This offers flexibility without forcing the creation of a Bypass Trust unless needed. This way, you're not locked into a strategy that may not make sense years down the road.

Let's Talk About Your Legacy

As you can see, there are many choices, benefits and pitfalls to navigate when creating a Bypass Trust. Please reach out to our Estate and Trust team to help analyze your choices when passing wealth to your family or other important people in your life.