A bypass trust fund is usually set up by married couples whose estates would go beyond the exemptible amount allowed by the IRS for estate taxes. It is set up to go around the estate taxes upon the death of either of the spouses in order to avoid paying taxes twice on the estate. The estate would be taxed once on the death of the spouse who leaves his or her estate to the other spouse and then taxed again on their death. Hence the term “bypass” trust.

Revocable or Irrevocable

The bypass trust can be set up to be a revocable trust, usually in the form of a living trust, or as an irrevocable trust fund. The wife could decide to have a trust fund in place that is irrevocable upon her death. But the normal situation is a revocable living trust that can be changed as needed during the life of both spouses.

How It Works

In a nutshell a bypass trust fund is set up usually my married couples. They make each other the beneficiary of their estate. A husband and wife have four million dollars in assets. This is above the exemption amount allowed by the IRS. So they decide to place their assets in a bypass trust fund. The husband dies and normally his estate would go to his wife and she would have to pay taxes on his estate then her heirs would have to pay the taxes again upon her death. As it would now be part of her estate. But the bypass trust would put his estate directly into the trust fund avoiding the estate taxes once.

Play By The Rules

But the IRS has rules that have to be followed in order to set up a bypass fund. The wording and set up of a bypass fund can be a tricky thing so you want to make sure your lawyer is well versed in this type of trust fund or you will lose out.

Limited Access While Alive

One of the rules is the beneficiary will have limited access to the trust fund while alive. They cannot just to what they want when they want to with the assets of the trust fund. And while this sounds like it defeats the purpose of providing for the spouse in actuality it can be quite flexible.

The grantor of the trust puts into writing exactly how the beneficiary can access the money. The grantor can specify a certain amount monthly or a certain percentage from the principle to be used. It can be specified as being used for living purposes or health care, however you want it set up. The flexibility comes in the beneficiary deciding what he needs to live.

Limited Access Upon Death

The beneficiary also cannot do just pass the trust on to his estate or choice of heirs upon his death. Bypass funds are set up so that the trust passes into the care of those chosen beforehand. The trust fund could state upon the death of the original beneficiary the trust goes to children, relatives or a business. You can also simply name the next beneficiary as well.

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