Santa Clarita Living Trusts Attorneys - Law Office of Robert Mansour

Bypass Trusts / Credit Shelter Trusts

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These kinds of trusts are often called "AB Trusts" - and they require a mandatory split of assets upon the first death. Basically, after the first spouse dies, the surviving spouse has to split the estate into two shares - on goes to the survivor's trust (the "A" Trust), and the other goes to the bypass trust (or the "B" trust).

A bypass trust is particularly useful for spouses who plan their estates together. Assets left to the bypass trust, avoid (or "bypass") estate taxes. In some cases, creating a bypass trust can eliminate estate taxes. That is why they are also commonly called "credit shelter" trusts. Also, assets in the bypass trust are protected from the "new" spouse or companion who invariably befriends the surviving spouse.

To effectively save taxes, a bypass trust must follow certain rules laid out by the IRS. Not only are there certain rules, but there is certain language that must be present in the living trust to allow such a maneuver to pass muster with the IRS. Remember, the government wants your money! They will look for whatever loopholes they can find to get to it.

Although a bypass trust can be very flexible in practice, it is critical that the trust be drafted with absolute precision. The IRS has specified the words that may be used in a bypass trust, and if these words aren't duplicated perfectly, the trust might not be excluded from tax in the second estate. Even the slightest drafting error can cost hundreds of thousands of dollars in taxes.