Creating an estate plan is an essential part of managing wealth and protecting your family. This is especially true, if you’re married and want to leave assets to your spouse. Understanding how a bypass trust works will help your planning, says KAKE.com’s recent article, “How a Bypass Trust Works in an Estate Plan.”

A bypass trust (also known as an AB trust), is a legal vehicle that permits married couples to avoid estate tax on certain assets, when one spouse dies. When that happens, the estate’s assets are split into two separate trusts. The first part is the marital trust, or “A” trust, and the other is a bypass, family or “B” trust. The marital trust is a revocable trust that belongs to the surviving spouse. A revocable trust has terms that can be changed by the individual who created it. The family or “B” trust is irrevocable, meaning its terms can’t be changed.

When the first spouse dies, his or her share of the estate goes into the family or B trust. The surviving spouse doesn’t own those assets but can access the trust during their lifetime and receive income from it. The part of the estate that doesn’t go into the B trust, is placed into the A or marital trust. The surviving spouse has total control over this part of the trust. In addition, the surviving spouse can be the trustee of a bypass trust or designate another person as the trustee. It is the trustee’s task to make sure that assets from the couple’s estate are divided appropriately into each part of the trust. The trustee also coordinates asset management, as instructed by the trust.

If properly drafted, an  AB Trust can also help prevent or reduce Capital Gains taxes and provide remarriage protection.  The first spouse to die can make sure his or her estate passes down to the children or whoever he or she wants it to go to, instead of the possibility of it going to the “replacement.”  I call this the Anna Nicole Smith protection.

This type of trust can also minimize estate taxes for married couples who have significant wealth. For the family or B part of the trust, assets up to an annual exemption limit aren’t subject to federal estate tax. In 2019, the limit is $11.4 million or $22.8 million for married couples. If assets in the B trust don’t exceed that amount, they wouldn’t be subject to federal estate tax.

Holding assets in a bypass trust lets the surviving spouse avoid probate. Any assets held in a bypass or other type of trust aren’t subject to probate.

Just about any size estate can benefit from a bypass trust.  How the bypass trust is drafted will depend on the value of your estate as well as the goals and objectives you and your family want to accomplish.  There is no such thing as one-size-fits-all when it comes to an AB Trust, so it’s imperative that you work with a professional estate planning attorney to create your bypass trust.

Reference: KAKE.com (August 13, 2019) “How a Bypass Trust Works in an Estate Plan”