What to Know About a Bypass Trust

When planning for the future, many families want to make sure their loved ones are cared for and their life savings stay protected. One estate planning tool that can help with this is a bypass trust. If you’ve come across this term but aren’t quite sure what it means or how it works, you’re not alone. At Gudorf Law Group, LLC, we regularly guide Ohio families through estate planning options in clear, plain language — and that includes explaining what a bypass trust is and how it might benefit your family.

A bypass trust is a type of trust typically used by married couples to protect assets and reduce estate taxes after one spouse passes away. This trust is often created within a will or revocable living trust and becomes active when the first spouse dies. The idea is that it “bypasses” the surviving spouse’s estate for tax purposes while still allowing that spouse to access income or assets if necessary.

Why Would Someone Need a Bypass Trust in Ohio?

A question we hear often at Gudorf Law Group is, why would someone use a bypass trust in Ohio, especially now that estate tax exemptions are higher than they were years ago? The answer comes down to protecting both wealth and future tax exemptions. If you have a taxable estate, meaning one large enough to potentially trigger estate taxes, a bypass trust can help use the first spouse’s estate tax exemption effectively. Without it, that exemption might be lost when the first spouse passes away. While laws have changed to allow something called portability (where the surviving spouse can use the deceased spouse’s remaining exemption by filing a tax form), this doesn’t cover everything.

A bypass trust is still especially useful for preserving something called the generation-skipping transfer (GST) exemption. This important tax exemption isn’t portable, meaning if you don’t use it with a bypass trust, it’s lost forever. The trust also keeps any future growth of the bypassed assets from adding to the surviving spouse’s estate, potentially protecting the family from higher taxes down the road if those assets increase in value.

How Does a Bypass Trust Work?

To keep it simple, when one spouse passes away, certain assets move into the bypass trust. These assets are no longer considered part of the surviving spouse’s estate for tax purposes.
However, the surviving spouse can still benefit from the trust, often receiving income or using some assets for things like health care, education, or support. After the second spouse passes away, the remaining trust assets are passed to beneficiaries (usually the couple’s children or grandchildren) without being taxed a second time as part of the surviving spouse’s estate. At Gudorf Law Group, we help families decide what assets belong in a bypass trust and make sure the paperwork is properly drafted and filed so everything works as it should when the time comes.

Is a Bypass Trust Irrevocable?

Another question clients ask us at Gudorf Law Group is whether a bypass trust can be changed after it’s created. The answer is no. A bypass trust becomes irrevocable when the first spouse passes away. This means its terms can’t be changed, and its assets must be managed according to the instructions originally set out in the trust.

While this might sound restrictive, it’s actually a key feature. The irrevocable nature of a bypass trust ensures that the estate tax exemptions and other protections built into the trust remain in place for the family’s benefit.

Does a Bypass Trust Require a Separate Tax ID Number?

Once a bypass trust becomes active, it does require its own separate Tax Identification Number (TIN). This number is used for filing tax returns for the trust itself, separate from the surviving spouse’s personal tax returns. This is an important part of how the trust keeps its assets separate from the surviving spouse’s taxable estate, which is one of its primary benefits. Our estate planning attorneys at Gudorf Law Group assist families with obtaining a tax ID for the trust and handle the details of how income taxes for the trust should be managed.

What Happens with Estate Taxes in a Bypass Trust?

The main purpose of a bypass trust in Ohio is to force the use of the first spouse’s estate tax credit without triggering an immediate tax payment. When assets are placed into the trust after the first spouse’s death, the estate uses up that spouse’s exemption amount, effectively reducing the size of the taxable estate.

This means when the surviving spouse eventually passes away, their own estate won’t be unnecessarily inflated by those previously bypassed assets, helping to reduce potential estate taxes for the next generation.

Does a Bypass Trust Provide Creditor Protection?

Another valuable benefit of a bypass trust is that it can provide protection from creditors for the beneficiaries. Depending on how the trust is written, it can shield inherited assets from the creditors of the surviving spouse and even the children or grandchildren who eventually inherit those assets.

At Gudorf Law Group, we carefully structure bypass trusts to help guard against potential risks, such as divorce, lawsuits, or financial problems that could affect family members down the road. This added layer of security makes a bypass trust an appealing option for many families concerned about protecting their legacy.

How Is a Bypass Trust Different from Other Trusts in Ohio?

If you’re wondering how a bypass trust in Ohio is different from other estate planning tools, the answer lies in its specific purpose. While living trusts and irrevocable trusts serve a variety of roles, a bypass trust is designed specifically for married couples to manage estate taxes and protect assets across two lifetimes.

If you’d like to learn more about other types of trusts in Ohio, including revocable and irrevocable options, the attorneys at Gudorf Law Group are here to help you explore your choices and pick the tools that best fit your family’s situation.

Contact Gudorf Law Group for an Estate Planning Consultation

If you’ve been asking yourself what is a bypass trust or what to know about bypass trusts, we’re here to provide clear, simple answers. Estate planning doesn’t need to be confusing or intimidating when you have experienced, caring attorneys on your side.

Contact Gudorf Law Group today to schedule your free estate planning consultation. We’ll review your situation, explain your options, and help you create a personalized plan that protects your assets, honors your wishes, and gives you peace of mind for the future.