Bypass Trust (also called B Trust or Credit Shelter Trust)

What is it?

A bypass trust is used to minimize federal estate tax on the combined estates of a married couple

A bypass trust (also called a B trust or a credit shelter trust) is a trust that can be used by married couples in conjunction with a marital trust to minimize federal estate tax that will be due on their combined estates. Assets will be transferred from the estate of the first spouse to die into the bypass trust such that his or her federal applicable exclusion amount (the amount that can be sheltered from gift and estate tax by the unified credit) is fully used. The remainder of the assets of the first spouse to die will then be transferred into the marital trust.

To prevent inclusion of the bypass trust in the estate of the surviving spouse, he or she can be given only certain rights and limited control over the assets in the bypass trust. He or she may receive income from the trust or may be given the right to invade the trust principal for his or her health, education, maintenance, or support. The surviving spouse may also be given a limited power of appointment over the assets in the bypass trust. A limited power of appointment permits the power holder to direct that the assets in the trust ultimately pass to a limited class of beneficiaries that does not include himself or herself, his or her estate, his or her creditors, or the creditors of his or her estate.

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