A good estate plan utilizes the appropriate financial vehicles to shelter assets from costly fees and taxes. Those vehicles will change depending on your situation. Couples, in particular, need to consider at least two financial tools: Bypass Trusts and Survivor's Trusts.
While the Survivor's Trust vs. Bypass Trust debate continues, both are integral components of today's best estate plans. Both serve different objectives, but can be crucial in an estate plan. As a result, we've created this guide to tell you everything you need to know about each type of Trust. Read on to learn about the differences between Survivor's and Bypass Trusts.
Survivor's Trust definition
A Survivor's Trust is a revocable sub-trust created to hold assets on behalf of a surviving spouse after the other spouse passes away. As its name suggests, the Survivor's Trust will receive the surviving spouse's assets from the previously shared Joint Trust; that way, the new Trust can provide the necessary financial support and protection for the surviving spouse. The revocable nature of these types of Trusts allows the surviving spouse to retain control over the assets and determine how they get distributed to beneficiaries.
Bypass Trust definition
A Bypass Trust is an irrevocable sub-trust created after one spouse in a Joint Trust passes away. Otherwise known as a Credit Shelter Trust or Family Trust, A Bypass Trust will typically receive the deceased spouse's assets (up to the estate tax exemption limit). The assets allocated to the Bypass Trust are no longer considered part of the original estate, reducing the couple's federal estate tax liability. As a result, Bypass Trusts are often used to preserve asset value for future beneficiaries by minimizing the estate tax liability.
Survivor's Trust vs. Bypass Trust: what's the difference?
Survivor's Trusts and Bypass Trusts are tools used in the estate planning process — and for good reason: both are particularly useful in helping couples preserve capital today and for future generations. That said, each Trust has its own unique features and benefits. Let's take a look at the differences between a Survivor's Trust vs. Bypass Trust, and see how each stacks up for your own needs:
What type of Trust is it?
Survivor's Trusts and Bypass Trusts are different types of Trusts. On the one hand, Survivor's Trusts are revocable. Surviving spouses are in complete control of Surviving Trusts. They can make any changes they deem necessary, including changing the beneficiaries or terminating the Trust altogether. Bypass Trusts, on the other hand, are inherently irrevocable. As a result, surviving spouses have no control over the assets (outside of collecting income) and can't make any changes to the account.
How is the estate divided?
When one spouse in a Joint Trust passes away, the terms of the original Trust typically dictate what happens to the estate's assets. Suppose the original terms call for the creation of a Bypass Trust and a Survivor's Trust. In that case, the assets will be divided between the new accounts. Typically, the Bypass Trust will receive the deceased spouse's assets (up to the estate tax exemption limit). That way, the estate can protect as much of its value as possible from taxes. Sending the decedent's assets to the Bypass Trust prevents them from being counted as part of the estate. The remaining assets (those not sent to the Bypass Trust) are usually transferred to the Survivor's Trust.
What are the distribution rules?
When a Survivor's Trust is established, the surviving spouse becomes the primary beneficiary. That way, when the first spouse passes away, the surviving spouse is taken care of financially. The surviving spouse will exercise complete control over the Survivor's Trust until they pass away. Upon the surviving spouse's passing, the assets held in the Survivor's Trust will be distributed to the named beneficiaries, per the terms of the respective documents.
The surviving spouse is typically named as the primary beneficiary of a Bypass Trust. However, the irrevocable nature of the Bypass Trust doesn't grant the surviving spouse any control over the account. While the surviving spouse may be able to draw income from the Bypass Trust, they can't do anything else. That said, the assets in the Bypass Trust will bypass the surviving spouse. It is worth noting, however, that the spouse isn't the only thing the assets bypass; they will also bypass estate taxes (up to the exemption limit) and the lengthy probate process. As a result, assets pass to beneficiaries without being subject to significant taxes after the surviving spouse passes away.
How does each affect beneficiaries?
A Survivor's Trust can help assets avoid the probate process. In doing so, beneficiaries will be able to collect the assets sooner and without the cost of probate taken out of their value. On the other hand, the assets held in a Bypass Trust may not be accessible to the surviving spouse. Still, the limited control comes with a unique advantage: assets in a Bypass Trust aren't counted as part of the original estate. As a result, the assets can simultaneously avoid estate taxes and the probate process. By the time the assets reach the named beneficiaries, the assets will have retained more value than if they were never placed in a Trust in the first place.
Set up your Trust today
The Survivor's Trust vs. Bypass Trust debate is understandable. Both Trusts are established upon the untimely passing of a loved one. However, that's about where the similarities end. Both Trusts serve a unique purpose: Survivor's Trusts take care of the surviving spouse's immediate needs. Bypass Trusts shelter assets through estate tax exemptions and secure generational wealth for beneficiaries.
Here at Trust & Will, we’ll make sure your Trusts complement your overall estate plan. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our other estate planning and settlement options today!
Is there a question here we didn’t answer? Browse more topics in our learn center or chat with a live member support representative!
Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.