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What Is a Bypass Trust? Definition, Uses and Importance.

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A bypass trust is a legal arrangement that prevents a married couple from paying tax on real estate properties and other assets when one of the spouses becomes deceased. 

Most times, couples who have enough assets gain more from the bypass trust arrangement as they don’t have to spend a chunk of their wealth on government taxes.  As soon as one of the spouses dies, their assets get divided into two – marital and family trust.

The marital trust is revocable and owned by the decedent’s surviving spouse. Being revocable means that the terms can be changed at any time by the originator of the will. The family trust, on the other hand, is irrevocable; which means that its terms cant be altered by anyone. 

Why is bypass trust important

A bypass trust is important because it aids in the reduction of state and federal estate taxes that married couples are meant to pay.

Also, even though the surviving spouse does not own the remaining assets, they do not get to lose touch with it. This means that they can still receive income from the assets as long as they are alive. 

Lastly, a bypass trust is important because it ensures that all the deceased spouse’s assets are appropriately disposed of or distributed. This is so that their surviving spouse chooses to go for a different investment plan or remarries along the line.

Note, the bypass trust needs to be drafted with utmost accuracy and precision. With that, allocating a property after a spouse dies won’t be difficult. 

How is bypass trust structured?

When one of the spouses passes on, their share of the assets or real estate properties is transferred to the family trust. What this means is that the living spouse owns none of the deceased’s direct assets. However, they are granted access to the assets and so, can receive any income that comes out of it during their lifetime. 

Oftentimes, the part of the assets that are transferred to the family trust is reserved for the surviving spouse; he or she will be in complete charge of this part of the assets.  means, they can choose to sell, giveaway, or spend any of this estate. 

In some cases, the surviving spouse can act as an executor of the bypass trust or choose someone else to act on their behalf. It is the executor’s responsibility to see that the estates and other assets that belong to the couple are appropriately separated. The division should be done equally to ensure that each party is given their rightful part of the assets. 

Finally, the executor will follow the terms of the bypass trust to make sure that the assets are properly managed.

Lifespan Of Bypass Trust

So far, there’s no specific timeline that a bypass trust is meant to last for. As stated earlier, the deceased’s spouse’s wealth will be allocated to the family trust. That of the surviving spouse will remain in their custody as long as they are still living,

That is why terms are given to the trustee. That way, they can properly manage the assets when both of the couples have all passed on. 

How is a Bypass Trust used?

Married couples with a huge estate and assets to their name are usually advised to protect it by opting for a bypass trust. That way, they can successfully reduce the taxes on their estates when one of the couples dies. This is done especially if the married couple has intentions of giving the assets to either of them that end up surviving death.

The married couple’s assets are not transferred to their children immediately after the death of one spouse. Rather, they are held and used as support by the surviving spouse to take care of the household. 

Note that the only heir or beneficiary to the bypass trust is the surviving spouse. The estate is only later distributed among the children after the surviving spouse is dead. 

Synonyms for Bypass Trust

Below are different words you can also use to describe bypass trust:

  • A and B trust
  • Family and a marital trust
  • Credit shelter trust 

How necessary is a Bypass Trust?

A bypass trust is absolutely useful in a lot of situations. For example, if the worth of your assets and estates is bigger than the current tax exemption on estates, then you can use a bypass trust to protect your estates from getting taxed. 

Are you still unsure if you truly need a bypass trust? Then consulting a qualified attorney will be the best way to go.

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