bypass trust

A trust that is created to minimize estate taxes by taking full advantage of a tax credit available when the first spouse dies. However, other estate planning tools must be used to minimize taxes when the second person dies.

A bypass trust takes advantage of a person’s lifetime unified gift and estate tax credit, which is the amount of money that can be left to beneficiaries without paying federal estate taxes. The credit is $1 million and is scheduled to increase to $3 million by 2009. If a married couple has $2.4 million of assets, the assets of the first spouse to die can be included in an estate that can give $1 million tax free to the couple’s children or other beneficiaries. The living spouse can also use the $1 million credit, and only the remaining $400,000 is taxed. Also called A/B trust, a unified credit trust, and credit shelter trust.