How Does a Bypass Trust Work?

Federal Estate Tax

Bypass trusts allow estate owners to avoid estate taxes by placing part or all of the owner's assets into a trust. Bypass trusts are set up to bypass the Federal Estate Tax. Bypass trusts are often featured in a will. The trust is left to the surviving spouse or other beneficiaries after the death of the owner. Funds or principal generated by the trust may be used to support the beneficiaries.

Estate Taxes

Federal estate taxes are assessed on estates worth $2 million or more. With a bypass trust added to a will, the surviving spouse may be able to avoid accumulating assets over $2 million--and avoid paying an estate tax. As long as the assets of the trust don't affect the value of the surviving spouse's assets, a bypass trust will work as a separate entity from the widowed spouse's assets--allowing the spouse to keep his assets below $2 million.

Other Benefits

The bypass trust may be used as a source of income for the trustees. Capital and interest are often used to provide an extra source of income for the surviving spouse. The tax-free estate is also subject to the wishes of the deceased, in accordance with the provisions of the will. Though the trust may be passed from spouse to spouse and then to children, the assets of the trust may only be legally handled by the beneficiaries as set by the terms of the deceased party's will.