bypass trust

A bypass trust (also called an AB trust or a credit shelter trust ) is a technique which allows married couples to avoid estate taxes on transfers of wealth to third parties up to a certain amount. It can be implemented through terms in each spouse’s will or through a living trust. 

Federal tax law exempts transfers of wealth through gift and probate by each citizen up to a certain amount, called the applicable exclusion amount (which starts at $13.9 million as of 2025). The central idea of the bypass trust is to take full advantage of each spouse’s applicable exclusion amount. Federal tax law includes an unlimited marital deduction for transfers between spouses, so this technique is typically used for transfers to third parties such as the couple’s children.

The technique involves creating an irrevocable trust, which usually contains all the decedent’s wealth up to the applicable exclusion amount. This trust has a third-party beneficiary, though the surviving spouse is often able to benefit from the interest and, in limited circumstances (such as healthcare expenses), from the principal. 

When the first spouse dies, an amount equal to the applicable exclusion amount is transferred to the bypass trust tax-free, with the remainder of the decedent’s wealth going to the survivor. The latter transfer is also tax-free due to the unlimited marital deduction. When the surviving spouse dies, their applicable exclusion amount will be applied to the estate taxes on the remainder of the couple’s wealth, meaning the couple benefits from two exclusion amount deductions. 

Bypass trusts are still used but have declined in popularity for two reasons. First, exclusion amounts have risen to the point that most couples’ wealth is less than one spouse’s applicable exclusion amount, meaning there is no benefit to two exclusion amount deductions. Second, exclusion amounts are now portable under federal tax law, meaning one spouse can transfer the unused portion of their exclusion amount to the other by filing with the IRS. Bypass trusts may still be useful in states with non-portable exclusion amounts.

[Last reviewed in June of 2025 by the Wex Definitions Team]

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