What Is a Bypass Trust?

A bypass trust is a very useful tool to help protect married couples and reduce their estate taxes. It can also help protect other assets for your future generations. Also called a credit shelter trust or AB trust, they help bypass over taxation of your estate, as explained more below. An experienced lawyer can help you determine when a bypass trust might be right for you.

At Filippi Law Firm, P.C., our California estate planning attorneys are ready to help. A bypass trust may be a very useful part of your overall estate plan.

How a Bypass Trust Works

A bypass trust is typically created as part of a married couple’s joint estate plan. When the first spouse dies, the trust divides into two parts:

• Trust A (Survivor’s Trust): Holds the surviving spouse’s share of the estate.
• Trust B (Bypass Trust): Holds the deceased spouse’s share, up to the federal estate tax exemption.

The assets placed in the bypass trust are considered “used” against the deceased spouse’s estate tax exemption. Because those assets are no longer owned by the surviving spouse, they are not included in the surviving spouse’s taxable estate when they later pass away. This structure allows the couple to “bypass” estate taxes on a significant portion of their wealth.

Key Features of a Bypass Trust

A bypass trust offers several important legal and financial protections:

1. Estate Tax Efficiency

Although California does not impose a state estate tax, federal estate tax rules still apply. A bypass trust ensures that both spouses fully use their federal estate tax exemptions. This can protect substantial assets from taxation, especially for high-net-worth families or those with appreciating property.

2. Asset Protection for the Surviving Spouse

The surviving spouse can typically:

• Receive income from the trust
• Access principal for health, education, maintenance, or support
• Continue living in the family home if it is held in the trust

3. Control Over Final Distribution

One of the strongest benefits of a bypass trust is the ability to control where assets go after the surviving spouse’s death. This is especially important for:

• Blended families
• Second marriages
• Parents who want to ensure children from a prior relationship inherit
• Individuals concerned about future remarriage

4. Protection Against Estate Shrinkage

Without a bypass trust, the surviving spouse could unintentionally reduce the estate through spending, gifting, or poor financial decisions. A bypass trust preserves the deceased spouse’s share for the intended heirs.

When a Bypass Trust Makes Sense in California

While federal estate tax exemptions are currently high, bypass trusts remain useful in several situations:

High-Value Estates

Families with significant real estate holdings, business interests, or investment portfolios may benefit from the long-term tax planning advantages of a bypass trust.

Blended Families

A bypass trust ensures that children from a prior marriage receive their intended inheritance, even if the surviving spouse remarries or changes their own estate plan.

Asset Protection Goals

Because the surviving spouse does not legally own the trust assets, those assets are generally shielded from:

• Creditors
• Lawsuits
• Bankruptcy
• New spouses

This makes bypass trusts a strong tool for long-term wealth preservation.

Long-Term Care Planning

If the surviving spouse later requires long-term care, the assets in the bypass trust may be better protected than assets held outright. While not a Medicaid planning tool, the structure can help preserve wealth for heirs.

How a Bypass Trust Is Created

A bypass trust is established within a revocable living trust. While both spouses are alive, the trust remains revocable and fully changeable. After the first spouse dies:

• The trust becomes partially irrevocable
• Assets are allocated between the survivor’s trust and the bypass trust
• A trustee, often the surviving spouse, manages the bypass trust according to its terms

Get Help With a Bypass Trust in California

A bypass trust makes it possible to reduce your estate tax bill and protect your assets. Spouses can utilize this trust structure effectively to protect each other, their property, and their future beneficiaries.

Let the dedicated estate planning attorneys at Filippi Law Firm, P.C. review your case. Contact us today for a consultation.