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What could a bypass trust do for you?

On Behalf of | Oct 20, 2022 | Trusts |

Married couples in Connecticut may want to open a bypass trust as one of their wealth transferring strategies. If you want to first pass on certain assets to your spouse, then your children, then a bypass trust is an option to consider.

Pass on assets to your spouse and other beneficiaries

A bypass trust is also known as an AB trust because it divides your assets between two trusts: A and B. The A trust is for your spouse, and the B trust is for your other beneficiaries.

Reduce estate taxes

Bypass trusts could reduce estate taxes for people who have large estates. When your surviving spouse dies, the remainder of their assets would transfer tax free to the new beneficiaries. If you don’t use a bypass trust, then the assets would be subject to estate tax when they pass on to the next beneficiaries.

Protect assets from creditors

The B trust is an irrevocable trust, so it shelters assets from creditors. Assets in an irrevocable trust are no longer property of the person who opened the trust. An exception to this is if the court finds that you intentionally avoided paying off debts by creating an irrevocable trust.

Allow spousal access

Your spouse has the ability to withdraw funds from the A trust but not the B trust. With a bypass trust, your spouse is automatically a trustee of the A trust. You could also name them the trustee of the B trust. In some situations, you could set this up so that your surviving spouse would receive unearned income from the B trust. If you were to do this, your spouse would have to pay tax on the income.

Bypass trusts protect some of your assets from creditors and reduce estate taxes. This type of trust may provide the most benefits to a wealthy married couple.