How to Set Up a Bypass Trust

A bypass trust is a tool used by married couples who do not want their heirs to be taxed twice on their estates. Without a bypass trust, when a spouse passes away, his surviving spouse is taxed on the inheritance. When the surviving spouse also passes on, her heirs are taxed again on this inheritance, hence the estate is taxed twice. To avoid this double-taxation, married couples often set up a bypass trust.

Things You'll Need

• Estate-planning attorney
• Will

Instructions

1. Find out the current allotment for each spouse to place into a bypass trust upon the first spouse's death. This number may change each year in accordance with federal government tax laws. An estate-planning attorney will know this amount and advise you when it changes, if you decide to use such an attorney.

2. Establish both bypass trusts at the same time so they mirror each other. Protection for spouses in a bypass trust will not work unless both are established. Because you never really know who will be the first one to pass away, the trusts should prepare for either spouse to pass away first.

3. Make your spouse the beneficiary of the trust, and have your spouse do the same. You should then name a beneficiary for the trust to pass to upon the death of the surviving spouse.

4. Divide up property that is currently deemed to pass to the surviving spouse through "right of survivorship." Each spouse must have a designated interest in each piece of property to calculate the value of property being transferred to the bypass trust once it is invoked.

5. Specify limited access to the bypass trust. A beneficiary of a bypass trust cannot take control of the money in the estate. Compute the amount of money needed each year for the surviving spouse to live on and then make an allotment for this money to be available.

6. Consider whom you will name as trustee for your bypass trust. You may wish to name your entire (immediate) family. This is most beneficial if both spouses die in a common accident and the trust would pass to children anyway.

7. Complete the required paperwork with the estate-planning attorney and then place the paperwork in a secure place. The attorney should also hold the original, or at least a copy, of the bypass trust paperwork.

Tips & Warnings

• You can set up a bypass trust only when the complete liquid value of the estate is over the IRS guidelines for exclusion.

• Though you and your spouse will set up the bypass trust while both of you are still living, the trust will not be initiated until the first spouse passes away.