[{"data":1,"prerenderedAt":292},["ShallowReactive",2],{"blog-/blog/what-is-a-bypass-trust/":3},{"_path":4,"_dir":5,"_draft":6,"_partial":6,"_locale":7,"title":8,"description":9,"date":10,"bucket":11,"head":12,"body":17,"_type":286,"_id":287,"_source":288,"_file":289,"_stem":290,"_extension":291},"/blog/what-is-a-bypass-trust","blog",false,"en","What Is a Bypass Trust? A Law Firm's Guide to Credit Shelter Planning","A bypass trust shelters assets from estate tax at the first spouse's death. Learn how it works, when it's still needed in 2026, and how to fund it correctly.","2026-07-16","trust-type",{"title":13,"meta":14},"What Is a Bypass Trust? A Law Firm's Guide to Credit Shelter Planning | TrustFunding",[15],{"name":16,"content":9},"description",{"type":18,"children":19,"toc":276},"root",[20,28,35,49,54,60,65,71,76,81,92,102,112,122,128,141,151,161,171,181,187,205,215,225,235,241,271],{"type":21,"tag":22,"props":23,"children":24},"element","p",{},[25],{"type":26,"value":27},"text","Even with the One Big Beautiful Bill Act permanently raising the federal estate tax exemption to $15 million per person, bypass trusts are still part of the estate-planning toolkit—and when one needs to be funded, the stakes for your firm are high. This guide explains what is a bypass trust, when it makes sense in today's environment, and what your firm must do to fund one correctly when the first spouse dies.",{"type":21,"tag":29,"props":30,"children":32},"h2",{"id":31},"what-is-a-bypass-trust",[33],{"type":26,"value":34},"What Is a Bypass Trust?",{"type":21,"tag":22,"props":36,"children":37},{},[38,40,47],{"type":26,"value":39},"A bypass trust—also called a credit shelter trust, family trust, or B-trust in an A-B arrangement—is an ",{"type":21,"tag":41,"props":42,"children":44},"a",{"href":43},"/blog/revocable-vs-irrevocable-trust-funding",[45],{"type":26,"value":46},"irrevocable trust",{"type":26,"value":48}," that receives assets from the deceased spouse's estate up to the applicable estate tax exemption amount. Rather than passing those assets outright to the surviving spouse (which would add them to the survivor's taxable estate at their later death), the assets \"bypass\" the survivor's estate entirely.",{"type":21,"tag":22,"props":50,"children":51},{},[52],{"type":26,"value":53},"The surviving spouse can still benefit. Most bypass trusts grant the survivor the right to receive all income and to access principal for health, education, maintenance, and support (the HEMS standard). But because the survivor holds no ownership interest in the trust, its assets—including any appreciation that accrues during the survivor's lifetime—are not included in the survivor's gross estate at death.",{"type":21,"tag":29,"props":55,"children":57},{"id":56},"bypass-trust-vs-credit-shelter-trust-same-thing",[58],{"type":26,"value":59},"Bypass Trust vs. Credit Shelter Trust: Same Thing",{"type":21,"tag":22,"props":61,"children":62},{},[63],{"type":26,"value":64},"The terms bypass trust and credit shelter trust are used interchangeably throughout estate-planning practice. \"Bypass\" describes what the assets do (bypass the survivor's taxable estate); \"credit shelter\" describes the mechanism (using the decedent's estate tax exemption, historically called the unified credit, to shelter assets from tax). You may see these trusts called Non-Marital Trusts, Family Trusts, or simply the \"B Trust\" in an A-B or A-B-C structure. The drafting conventions vary by firm and state, but the underlying tax logic is identical.",{"type":21,"tag":29,"props":66,"children":68},{"id":67},"when-does-a-bypass-trust-still-make-sense-after-the-obbba",[69],{"type":26,"value":70},"When Does a Bypass Trust Still Make Sense After the OBBBA?",{"type":21,"tag":22,"props":72,"children":73},{},[74],{"type":26,"value":75},"The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently raised the federal estate and gift tax exemption to $15 million per individual—$30 million for a married couple—effective January 1, 2026. The exemption is indexed for inflation going forward. With federal portability also available, many practitioners are asking whether bypass trusts are still worth the administrative effort.",{"type":21,"tag":22,"props":77,"children":78},{},[79],{"type":26,"value":80},"The answer is often yes—for these reasons:",{"type":21,"tag":22,"props":82,"children":83},{},[84,90],{"type":21,"tag":85,"props":86,"children":87},"strong",{},[88],{"type":26,"value":89},"State estate taxes.",{"type":26,"value":91}," Portability is a federal concept only. Massachusetts, Oregon, Maryland, Washington, and several other states impose their own estate taxes, with exemptions ranging from $1 million to $2.193 million (Washington, 2026). No state recognizes federal portability. A bypass trust is frequently the only mechanism for preserving the first-to-die spouse's state exemption and avoiding a state-level estate tax bill at the survivor's death.",{"type":21,"tag":22,"props":93,"children":94},{},[95,100],{"type":21,"tag":85,"props":96,"children":97},{},[98],{"type":26,"value":99},"Appreciating assets.",{"type":26,"value":101}," Assets inside a bypass trust grow outside the survivor's estate. For real estate, closely held business interests, or equity holdings expected to appreciate substantially, this can mean significant tax savings for the next generation—even when the federal picture appears clean.",{"type":21,"tag":22,"props":103,"children":104},{},[105,110],{"type":21,"tag":85,"props":106,"children":107},{},[108],{"type":26,"value":109},"Estates above $30 million.",{"type":26,"value":111}," Couples with combined assets over the federal threshold still need bypass trust planning as a structural tool, often layered with GRATs, SLATs, and charitable strategies.",{"type":21,"tag":22,"props":113,"children":114},{},[115,120],{"type":21,"tag":85,"props":116,"children":117},{},[118],{"type":26,"value":119},"Pre-OBBBA documents.",{"type":26,"value":121}," A substantial volume of existing A-B trust plans were drafted under old exemption levels and contain mandatory funding formulas. Those documents need review now. Some clients may benefit from disclaimer-based planning instead of mandatory bypass trust funding; others may need their documents updated to prevent over-sheltering.",{"type":21,"tag":29,"props":123,"children":125},{"id":124},"how-a-bypass-trust-is-funded",[126],{"type":26,"value":127},"How a Bypass Trust Is Funded",{"type":21,"tag":22,"props":129,"children":130},{},[131,133,139],{"type":26,"value":132},"Funding happens after the first spouse dies—it doesn't happen automatically at signing. This is where your firm's post-death administration work begins—and where a ",{"type":21,"tag":41,"props":134,"children":136},{"href":135},"/",[137],{"type":26,"value":138},"dedicated trust funding partner",{"type":26,"value":140}," can carry the retitling and documentation load.",{"type":21,"tag":22,"props":142,"children":143},{},[144,149],{"type":21,"tag":85,"props":145,"children":146},{},[147],{"type":26,"value":148},"Review the formula clause.",{"type":26,"value":150}," Most A-B trusts use either a pecuniary formula (a fixed dollar amount tied to the exemption) or a fractional-share formula to determine how much pours into the bypass trust versus the surviving spouse's trust. Read the document carefully before taking any action; funding the wrong amount can have gift tax and estate tax consequences.",{"type":21,"tag":22,"props":152,"children":153},{},[154,159],{"type":21,"tag":85,"props":155,"children":156},{},[157],{"type":26,"value":158},"Obtain date-of-death valuations.",{"type":26,"value":160}," The bypass trust is funded up to the decedent's available exemption. Liquid assets (bank accounts, brokerage holdings) are straightforward, but real estate, business interests, and closely held assets require qualified appraisals as of the date of death.",{"type":21,"tag":22,"props":162,"children":163},{},[164,169],{"type":21,"tag":85,"props":165,"children":166},{},[167],{"type":26,"value":168},"Retitle the assets.",{"type":26,"value":170}," Liquid assets move first: financial institutions require a death certificate, the trust agreement, and often a trustee certification or letters testamentary. For real property, prepare and record a deed transferring title from the decedent (or the revocable trust) to the trustee of the bypass trust. Update property insurance and any existing liens to reflect the new title.",{"type":21,"tag":22,"props":172,"children":173},{},[174,179],{"type":21,"tag":85,"props":175,"children":176},{},[177],{"type":26,"value":178},"Coordinate tax elections.",{"type":26,"value":180}," Work with the estate's CPA to ensure proper allocation of stepped-up basis, GST exemption elections, and—if an A-B-C structure is in play—any QTIP elections for the marital (C) trust. These elections are typically due with the federal estate tax return (Form 706), which is due nine months from the date of death with a six-month extension available.",{"type":21,"tag":29,"props":182,"children":184},{"id":183},"common-bypass-trust-funding-mistakes",[185],{"type":26,"value":186},"Common Bypass Trust Funding Mistakes",{"type":21,"tag":22,"props":188,"children":189},{},[190,195,197,203],{"type":21,"tag":85,"props":191,"children":192},{},[193],{"type":26,"value":194},"Never funding the trust.",{"type":26,"value":196}," Some A-B plans go unfunded at the first death because the survivor or the firm doesn't realize action is required—a costly version of the ",{"type":21,"tag":41,"props":198,"children":200},{"href":199},"/blog/why-trust-funding-is-critical-in-estate-planning",[201],{"type":26,"value":202},"broader unfunded-trust problem",{"type":26,"value":204},". The bypass trust does not fund itself; it requires intentional asset transfers.",{"type":21,"tag":22,"props":206,"children":207},{},[208,213],{"type":21,"tag":85,"props":209,"children":210},{},[211],{"type":26,"value":212},"Over-funding under the new exemption.",{"type":26,"value":214}," Under the OBBBA, fully funding a bypass trust to the formula amount may add unnecessary administrative burden if portability or a disclaimer would achieve the same federal tax result with less complexity. This is particularly common in pre-2025 documents.",{"type":21,"tag":22,"props":216,"children":217},{},[218,223],{"type":21,"tag":85,"props":219,"children":220},{},[221],{"type":26,"value":222},"Using IRA or retirement assets.",{"type":26,"value":224}," Retirement accounts carry income in respect of a decedent (IRD). Funding a bypass trust with IRA or 401(k) assets without a qualifying trust provision under IRC § 401(a)(9) accelerates income tax recognition. Retirement assets require careful coordination with the document and the client's tax advisor before being directed to a bypass trust.",{"type":21,"tag":22,"props":226,"children":227},{},[228,233],{"type":21,"tag":85,"props":229,"children":230},{},[231],{"type":26,"value":232},"Commingling funds.",{"type":26,"value":234}," Once the bypass trust is funded, its assets must be maintained separately from the survivor's trust. Commingling creates accounting problems and risks compromising the trust's tax treatment.",{"type":21,"tag":29,"props":236,"children":238},{"id":237},"key-takeaways",[239],{"type":26,"value":240},"Key Takeaways",{"type":21,"tag":242,"props":243,"children":244},"ul",{},[245,251,256,261,266],{"type":21,"tag":246,"props":247,"children":248},"li",{},[249],{"type":26,"value":250},"A bypass trust (credit shelter trust) shelters assets from estate tax by holding them outside the surviving spouse's taxable estate while still allowing the survivor to benefit under the HEMS standard.",{"type":21,"tag":246,"props":252,"children":253},{},[254],{"type":26,"value":255},"Despite the OBBBA's $15 million federal exemption, bypass trusts remain essential for state estate tax planning, appreciating assets, and estates above the federal threshold.",{"type":21,"tag":246,"props":257,"children":258},{},[259],{"type":26,"value":260},"Funding occurs after the first spouse's death—confirm the formula clause, obtain date-of-death valuations, retitle assets, and coordinate tax elections with the estate's CPA.",{"type":21,"tag":246,"props":262,"children":263},{},[264],{"type":26,"value":265},"Retirement accounts require careful handling before being directed to a bypass trust; improper funding can trigger accelerated income tax liability.",{"type":21,"tag":246,"props":267,"children":268},{},[269],{"type":26,"value":270},"Every pre-OBBBA A-B trust document should be reviewed now—mandatory funding formulas may no longer serve the client's best interests under the new exemption levels.",{"type":21,"tag":272,"props":273,"children":275},"cta-book-meeting",{"show-secondary":274},"true",[],{"title":277,"searchDepth":278,"depth":278,"links":279},"",2,[280,281,282,283,284,285],{"id":31,"depth":278,"text":34},{"id":56,"depth":278,"text":59},{"id":67,"depth":278,"text":70},{"id":124,"depth":278,"text":127},{"id":183,"depth":278,"text":186},{"id":237,"depth":278,"text":240},"markdown","content:blog:what-is-a-bypass-trust.md","content","blog/what-is-a-bypass-trust.md","blog/what-is-a-bypass-trust","md",1784276016571]