By-Pass Trust

A by-pass trust can also help ensure that a surviving spouse can avoid the “waste” of some a deceased spouse's estate tax exemption without resorting to portability and the filing of a federal estate tax return.

In typical by-pass trust planning, the first spouse to die will have established a by-pass trust (also referred to as an exemption trust or a credit shelter trust) in that spouse’s estate planning documents, to be funded only upon that spouse’s death, and only up to the amount of the decedent’s remaining exemption. The surviving spouse can be the beneficiary of the by-pass trust and the trustee, but it can have other beneficiaries and other trustees. Typically it provides that trust assets can be used for the support, maintenance, and health of the surviving spouse, terms which are interpreted generously under the federal estate tax laws and regulations.

However, in reality, there are many reasons why a first spouse to die might establish a trust for the surviving spouse that have nothing to do (any more) with estate tax concerns. It is often done for asset-protection purposes for the surviving spouse. In a second marriage, it is a method to provide for the surviving spouse during his or her lifetime, but to ensure the remaining trust assets are returned to the children of the first spouse to die.