Bypass Trust
What Does Bypass Trust Mean?
A bypass trust is an estate planning tool designed to maximize the amount of assets that couples can transfer to their beneficiaries after their deaths. Bypass trusts achieve this by being subject to significantly lower taxes compared to regular assets.
Additionally, a bypass trust can serve as an alternative to a life insurance trust. Because life insurance proceeds and trust payouts can each be taxed differently depending on how they are structured, couples weighing these options should understand when and how life insurance is taxed.
Insuranceopedia Explains Bypass Trust
Bypass trusts are created by couples, and the trust splits into two separate trusts when one partner dies. One of these trusts is entirely exempt from taxation, allowing significant tax savings for individuals with large estates, potentially amounting to hundreds of thousands or even millions of dollars.
Bypass trusts are often prepared by lawyers, as they must be properly drafted to be legally valid. Naming beneficiaries correctly is just as important in a bypass trust as it is in a life insurance policy, where mistakes can delay or redirect payouts. A rundown of common errors and how to avoid them is covered in this guide to life insurance beneficiary rules.
