Gifting Strategies

Bypass Trust

If the applicable exclusion amount is not used at the first spouse’s death, the unused exclusion amount cannot be passed on to the surviving spouse.  You must use it or lose it. Failure to take advantage of the applicable exclusion amount at the first spouse’s death can have a major impact on the estate taxes due at the surviving spouse's death.  

A common estate planning technique that can be used to address this situation is the Credit Shelter Trust, also referred to as a “bypass“  trust.  The bypass trust takes advantage of the applicable exclusion amount allowed to each spouse and is typically created in conjunction with a marital trust.  This technique is primarily established for reducing estate taxes upon the death of the surviving spouse.  It does so by transferring assets valued up to the estate applicable exclusion amount, currently $2,000,000 into a bypass trust.  The remaining assets of the spouse who is first to die may be assigned to a marital trust for the benefit of the surviving spouse and qualify for the unlimited estate marital deduction.  These trust arrangements may be established as part of an inter vivos trust (such as a revocable trust) created during your lifetime, or as a testamentary trust created at death as provided in your will.

Bypass trusts should be funded with assets that are considered separate property and that do not legally pass to the surviving spouse. For example, property titled as joint tenancy with right of survivorship is not separate property.  A bypass trust may be funded with an individual’s share of community property.   If you or your spouse do not have separate assets sufficient to fund a bypass trust, either of you can make gifts to the other sufficient to fund the trust.  (These assets must be retitled to reflect individual ownership.)  Gifts between spouses are generally not subject to gift tax.