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Trust Law/Level III · Family trusts/3.3 Couples and blended families/Lesson 1

Marital and bypass trusts

How bypass trusts and portability let US married couples use both spouses’ federal estate tax exclusions, and why some still use a trust.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The usual zero-cost route is portability: the executor elects the unused exclusion on Form 706 even with no tax due; the 2026 basic exclusion is $15 million per person. Catch: file on time, or within five years if otherwise not required (Rev. Proc. 2022-32).
  2. A portability-only Form 706 may estimate rather than appraise property passing to the spouse or charity (Treas. Reg. §20.2010-2(a)(7)(ii)), cutting appraisal costs. Catch: the estates required to file anyway cannot use this shortcut.
  3. Leave everything to the spouse but allow a disclaimer into a bypass trust: a qualified disclaimer within 9 months (IRC §2518) lets the survivor decide with hindsight. Catch: the survivor must not accept benefits first or direct where the disclaimed property goes.
  4. Keep a mandatory bypass trust only where it pays: state estate tax without portability, expected growth, the GST exemption, or control for children. Catch: bypass assets get no second basis step-up at the survivor’s death (IRC §1014).

MaterialsA copy of your current will or trust documentsThe IRS Form 706 instructions for the most recent tax yearA list of all assets owned by you and your spouse, including titlesWhether your state has its own estate or inheritance tax, and if so its threshold

Wonder

  1. Do I still need a bypass trust if my spouse can use my unused tax exemption?
  2. How does a bypass trust protect assets from the surviving spouse’s creditors or new marriage?
  3. What happens to the growth on the assets in Trust B while my spouse is alive?

Explore

  1. In the United States, a bypass trust, also called a credit-shelter or ‘B’ trust, is usually set up by a will or a revocable living trust and becomes irrevocable when the first spouse dies. At that death, assets up to the deceased spouse’s unused federal exclusion go into it. The bypass trust is deliberately not given the marital deduction; no estate tax is due on it because it is covered by the first spouse’s own exclusion. The rest can pass to the survivor, outright or in a marital (‘A’) trust, free of tax under the unlimited marital deduction. Before portability, this was the main way for a couple to use both spouses’ exclusions.
  2. Trust A, the marital share, is given to or held for the surviving spouse in a form that qualifies for the marital deduction. Trust B, the bypass trust, often pays income to the surviving spouse for life and may allow some principal for the spouse’s needs, then passes to beneficiaries the first spouse chose, often the children. Because the survivor does not own Trust B outright, it is not counted in the survivor’s estate, and with a spendthrift clause its assets are often harder for the survivor’s creditors to reach; protection depends on state law. In blended families it can keep the first spouse’s share for that spouse’s children.
  3. Portability came in with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, for spouses dying after 31 December 2010, and was made permanent by the American Taxpayer Relief Act of 2012. Under Internal Revenue Code §2010(c)(4)-(5), the executor of the first spouse’s estate can elect to pass that spouse’s unused exclusion, the ‘deceased spousal unused exclusion’ (DSUE) amount, to the survivor. The election is made on a timely filed Form 706 (Part 6), even if no tax is due, and is irrevocable once made; IRS Revenue Procedure 2022-32 allows a late election up to five years after death for estates not otherwise required to file. Only the last deceased spouse’s DSUE amount can be used.
  4. Even where portability removes the federal tax reason, some families still use bypass trusts. One reason is growth: the bypass trust’s value, including growth during the survivor’s life, is not in the survivor’s estate, whereas a DSUE amount is fixed when the first spouse dies and is not adjusted for inflation. Portability also does not carry over the generation-skipping transfer (GST) exemption. There is a trade-off: assets in a bypass trust usually get no new tax basis at the survivor’s death under IRC §1014, so heirs may owe more capital gains tax when they sell. Which effect is larger depends on the assets and the tax rules in force.
  5. State laws also matter. Portability applies to the federal estate tax; most states with their own estate tax do not let a survivor use a deceased spouse’s unused state exemption, and some state exemptions are far below the federal one. In those states, some couples use a bypass trust so that the first spouse’s state exemption is not wasted. State rules and thresholds change, so a plan that works federally may give a different result at the state level. Check your own state’s current rules.
  6. Control is another factor. A bypass trust lets the first spouse decide who receives the trust’s assets after the survivor dies. Without it, if everything passes outright to the survivor under the marital deduction, the survivor owns it and can spend it or leave it to anyone, including a new spouse. For families with particular goals, such as charitable gifts or providing for children of an earlier marriage, a bypass trust keeps the first spouse’s choices in place for that share.

Key facts

  • Portability applies for spouses dying after 31 December 2010; it began with a 2010 act and was made permanent in 2012.
  • The DSUE amount passes to the survivor only if the executor elects it on a timely filed Form 706 (Part 6); the election is irrevocable.
  • Assets in a bypass trust are generally not included in the surviving spouse’s estate for federal tax purposes if properly structured.
  • The unlimited marital deduction covers transfers to a spouse or a qualifying marital trust; a bypass trust is instead sheltered by the first spouse’s own exclusion.
  • Portability does not automatically apply to all state estate taxes; some states do not recognize the DSUE election.
  • The federal basic exclusion is $13.99 million per person for 2025 and $15 million per person for 2026 (One Big Beautiful Bill Act, July 2025).

Exercise nine, six, three, one

9CollectGather 9 specific details about your family’s financial and relational landscape: list all major asset titles (joint vs. individual), identify any children from previous relationships, note any anticipated creditor risks for either spouse, check if you live in a state with an estate tax, determine the current value of your combined assets relative to the federal exemption, review who would be named as trustee in a potential A-B trust, assess whether your partner might remarry, list any charitable intentions from either spouse, and note any disability considerations for future beneficiaries.
6ClusterSort these 9 details into 6 categories: Asset Ownership Structure, Family Dynamics and Control Risks, State Tax Implications, Federal Exemption Utilization, Creditor Protection Needs, and Legacy Distribution Goals. Group each detail under the category where it most significantly impacts your trust planning decision.
3DistillReduce the 6 categories to 3 possible reasons a couple might consider a bypass trust: 1) control over who finally receives the first spouse’s share, 2) protection from the survivor’s creditors and from state estate tax not covered by federal portability, and 3) keeping growth on the trust’s assets out of the survivor’s estate.
1CrystallizeWrite 1 sentence naming which of the 3 reasons, if any, seems to apply to your family, and the question you would want an adviser to answer.

Fact check

Dates, figures and claims checked against the published sources listed below.

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