Major Characteristics of a Bypass Trust (Family Trust)

• At the first death, the will or revocable living trust provides for the establishment of a trust equal to the amount that could be passed tax-free as part of the applicable credit.
• The balance of the estate typically passes to the surviving spouse outright or in a trust that qualifies for the unlimited Marital Deduction.
• The surviving spouse and/or family members may receive income and principal from the Family Trust under certain standards.
• Care must be taken that no right be granted that causes the trust assets to be included in the surviving spouse’s estate.
• If properly set up at the death of the surviving spouse, the assets remaining in the Family Trust should not be taxed in the estate of the surviving spouse.

Benefits of a Bypass Trust (Family Trust)

• The assets remaining in the Family Trust at the death of the surviving spouse can pass outright to the heirs or in trust for their benefit; this helps avoid both estate taxation and probate expenses at the surviving spouse’s death.
• Through proper planning, a married couple may use a Family Trust to transfer a defined amount of assets to their children or other beneficiaries free of federal estate taxes. This amount is determined by the applicable credit.
• The decedent may specify who will receive the remaining assets at the death of the surviving spouse, which can help provide peace of mind.
• If a person selects a corporate fiduciary (Bank Trust Department) to serve as trustee or co-trustee, the beneficiaries receive professional asset management.
• The amount of the estate passing to the surviving spouse (in excess of what is put in the Family Trust) may qualify for the unlimited marital deduction and therefore pass tax-free at the death of the first spouse.

Pitfalls of a Bypass Trust (Family Trust)

• Additional death taxes are due upon the first spouse’s death to the extent that distributions to the Family Trust exceed the applicable credit allowed (that is, to the extent that the Family Trust is over funded).
• If the unlimited marital deduction had been utilized at the first spouse’s death (that is, if the Family Trust had been under funded or not implemented at all), additional dollars could have been available to the surviving spouse. (However, these funds, as well as any accumulation on these funds, are subject to estate taxation in the estate of the surviving spouse if not consumed or removed from the gross estate by other means.)