bypass trust

Can you provide an example of a person that would benefit from establishing a bypass trust?

A bypass, or credit-shelter, trust is often used by married couples whose combined assets exceed the amount sheltered by the U.S. applicable estate tax credit ($2,000,000 in 2008, scheduled to be $3,500,000 in 2009), but are not so large that the surviving spouse will not need access to all of the couple's combined assets. Consider, for example, spouses who have combined assets of $3,000,000 (when the applicable estate tax credit shelters $2,000,000): if the surviving spouse inherits the combined assets outright and dies with $3,000,000, currently a federal estate tax will be due on the assets in excess of $2,000,000. If, instead, the predeceased spouse had left $1,000,000 to a bypass trust in which the surviving spouse had liberal rights in income and principal (but had no interest in the trust which would cause the trust property to be included in the surviving spouse's gross estate for estate tax purposes), and the assets owned by the surviving spouse did not exceed $2,000,000 at death, no federal estate tax (under the estate tax law in effect in 2008) would be payable. The savings in federal estate tax at 2008 rates is $450,000. State estate tax savings may also result.

Stephen F. Lappert, Partner, Trusts and Estates Department, Carter Ledyard & Milburn LLP, New York, NY