Bypass Trust


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.

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 The person who creates the trust specifies how much money can be withdrawn and for what purpose.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


Investment dictionary. . 2012.

Look at other dictionaries:

  • bypass trust — see trust Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. bypass trust …   Law dictionary

  • Bypass trust — A bypass trust is typically created as part of an A/B Living trust estate plan after the death of the first spouse to die.The bypass trust receives property as specified in the trust document the bypass trust may receive all of the property of… …   Wikipedia

  • bypass trust — An irrevocable trust that is designed to pay trust income (and principal, if needed) to an individual s spouse for the duration of the spouse s lifetime. The bypass trust is not part of the beneficiary spouse s estate and is not subject to… …   Financial and business terms

  • trust — n 1 a: a fiduciary relationship in which one party holds legal title to another s property for the benefit of a party who holds equitable title to the property b: an entity resulting from the establishment of such a relationship see also… …   Law dictionary

  • bypass shelter trust — by·pass shelter trust n: bypass trust at trust Merriam Webster’s Dictionary of Law. Merriam Webster. 1996 …   Law dictionary

  • trust — A legal entity created by a grantor for the benefit of designated beneficiaries under the laws of the state and the valid trust instrument. The trustee holds a fiduciary responsibility to manage the trust s corpus assets and income for the… …   Black's law dictionary

  • disclaimer trust — A kind of bypass trust that gives the surviving spouse the option of not splitting the trust after the first spouse s death if it s not necessary to save on estate tax. A surviving spouse may disclaim (decline to accept) some trust property; that …   Law dictionary

  • AB trust — A trust that allows couples to reduce or avoid overall. Each spouse puts property in the AB trust. When the first spouse dies, his or her half of the property goes to the named in the trust commonly, the couple s grown children with the crucial… …   Law dictionary

  • credit shelter trust — see trust Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. credit shelter trust …   Law dictionary

  • exemption trust — A bypass trust funded with an amount no larger than the personal federal estate tax exemption for the year of death. If the trust grantor leaves property worth more than that amount, it usually goes to the surviving spouse. The trust property… …   Law dictionary


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