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What is a bypass trust?

On Behalf of | Jan 12, 2022 | Trusts |

In Connecticut, a bypass trust is a tool for avoiding some of the estate tax that would otherwise be due over the course of the deaths of a couple who leave assets for their children. It involves creating two trusts and transferring assets from one to the other at key times.

The use of bypass trusts

When a couple has accumulated a considerable amount of wealth, they face a correspondingly high estate tax burden. Much of the estate planning for older couples with more wealth involves coming up with ways to minimize their future tax burden so that they can preserve as much as they can for their heirs. Trusts are a set of tools that can be very helpful in this situation, and a bypass trust is one of the potential pathways.

In a bypass trust strategy, when the first member of a couple dies, they leave some of their assets in one trust with their spouse as the beneficiary. This trust contains lower-value assets. Then the second trust contains the most high-value assets, and the beneficiaries are the heirs of the couple as a whole. Splitting the assets is a tax reduction strategy. Estate taxes only kick in when the assets are above a certain level, and transfers between couples are not taxed. So reducing the trusts can bring them both below the level at which they are taxed on the estate level as well as turning them into tax-free transfers. It’s an ideal strategy for situations where there are, for example, children from previous marriages involved.

Bypass trusts are not suitable for everyone, but they do provide a good way to lower tax burdens depending on the circumstances.