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Bypass Trust (Marital Life Estate Trust)


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A Bypass Trust (also called a Credit Shelter Trust, Exemption Trust, or, in come cases, a "Family Trust") is used for married couples who have a net worth greater than the amount which is exempt from estate taxes ($2,000,000 in 2008).

A Bypass Trust permits a couple to pass the maximum amount of property to their children or other beneficiaries after both spouses die, while at the same time ensuring the surviving spouse is financially comfortable. It's one of the few times in life you really can have it both ways.

A Bypass Trust works as follows: Instead of leaving property outright to the survivor, each spouse leaves an amount of property to a By Pass trust. Let's say the husband leaves assets worth $2,000,000 a Bypass Trust for the benefit of his wife. The surviving spouse can use that property, with certain restrictions, but doesn't own it outright. That's the reason behind the big tax savings: the property isn't subject to estate tax when the second spouse dies, because the second spouse never legally owned it.

He leaves the rest of his estate to his wife tax free because there is no tax on what one spouse leaves to another spouse.

When setting up a marital life estate trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people--the couple's children--as final beneficiaries, but it's not mandatory.

When the wife dies, she can leave $2,000,000 to the children without tax. The assets in the trust also pass to the children tax free. (Those assets belonged to the trust - not to her.) The effect is that $4,000,000 passes to the children with no estate tax.

A bypass trust can be set up as a living trust or in a Will as a testamentary trust. It can be revocable or irrevocable.

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