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When it comes to building an estate plan, trusts are a common tool used to manage assets, minimize taxes and set things up for a smooth transfer of wealth. Two trusts you may come across in the estate planning process include bypass trusts and marital trusts, both of which can protect assets and provide financial security to surviving family members. However, these trusts operate in distinct ways and are designed to achieve different goals within an estate plan. Before settling on a specific type of trust, make sure you compare these key differences.
Estate planning can be complex, and you don't have to do it on your own. A financial advisor can help you create a plan that puts you and your family at ease.
A bypass trust, also known as a credit shelter trust or family trust, is an estate planning tool that allows married couples to minimize estate taxes when passing assets to their heirs. It's particularly beneficial for those with significant assets, as it helps ensure that a portion of the estate bypasses estate taxes entirely. This strategy takes advantage of the federal estate tax exemption, which allows individuals to pass a certain amount of wealth tax-free to beneficiaries. In 2025, that amount is $13.99 million (up from $13.61 million in 2024) for individuals.
When one spouse passes away, assets up to the value of the estate tax exemption are transferred into the bypass trust. The surviving spouse can benefit from these assets during their lifetime, often through income distributions, but the assets themselves remain outside of their estate. This means that when the surviving spouse passes away, the assets in the bypass trust will transfer to the trust's beneficiaries tax-free, effectively sheltering them from taxation twice.
Bypass trusts are an option for families seeking to preserve wealth across generations. However, they can be complex, requiring careful management and legal oversight to comply with evolving tax laws. While bypass trusts are less common now due to changes in tax laws, they're still a potential strategy for high-net-worth individuals.
A marital trust could help you transfer assets to the surviving spouse without incurring estate taxes, while preserving wealth for future generations. Marital trusts are often used by couples to maximize tax benefits, especially when their combined estate may exceed the federal estate tax exemption limit.
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There are several types of marital trusts, but the most common is the A Trust. With an A Trust, the surviving spouse receives income generated by the trust's assets, but cannot sell or give away the assets. This ensures that the remaining assets will pass on to other heirs, preserving the deceased spouse's wishes.
A marital trust can help reduce estate taxes, offer financial security to the surviving spouse and protect family assets. It also provides clarity in estate distribution, helping to prevent potential disputes among heirs. For example, if the surviving spouse remarries, a marital trust can ensure the deceased spouse's children, not the surviving spouse's new partner, receive the assets.
The main advantage of a bypass trust is its tax efficiency. By placing assets in the trust, families can minimize or avoid estate taxes, particularly when the combined value of a couple's assets exceeds the estate tax exemption limit. This allows wealthy families to pass on more of their assets to their heirs.
However, bypass trusts come with drawbacks. The surviving spouse has limited control over the trust's principal, which can create a sense of financial restriction. Bypass trusts can also be complex, often requiring legal guidance and ongoing administrative costs.
A key benefit of a marital trust is the flexibility it provides to the surviving spouse. They typically receive all income generated by the trust and may have the right to withdraw principal under certain circumstances. This makes a marital trust an appealing option for couples who want to make sure the surviving spouse maintains their financial security.
The primary downside is that estate taxes are only postponed, not eliminated. When the second spouse dies, the remaining assets in the trust are subject to estate tax, potentially reducing the inheritance left for beneficiaries.
Trusts are powerful tools in estate planning that offer flexibility, control and protection for your assets. At their core, trusts allow you to specify how and when your wealth is distributed. Unlike wills, which go through the public probate process, trusts remain private. This can protect your family’s financial information and reduce the risk of disputes. Trusts also provide more control over the distribution of assets, allowing you to set conditions for when and how beneficiaries receive their inheritance.
One of the most significant benefits of trusts is their ability to reduce estate taxes. Certain types of trusts, like irrevocable trusts, remove assets from your taxable estate, potentially saving your heirs from paying hefty estate taxes. This can be particularly beneficial if you have a large estate or anticipate changes in tax laws that could affect your legacy. Trusts also safeguard your assets from creditors and legal claims, so by placing assets in a trust, they're generally protected from lawsuits or financial mismanagement.
Finally, the versatility of trusts means you can tailor them to fit your specific estate planning goals. So whether you’re aiming to support a charitable cause, provide ongoing care for a loved one or minimize tax burdens, a trust could be a strategic financial solution.
Choosing between a bypass trust and a marital trust depends on your estate planning goals. A bypass trust reduces estate taxes by excluding assets from the surviving spouse’s estate, helping pass wealth to future generations efficiently. A marital trust, however, provides the surviving spouse with access to the assets during their lifetime and passes remaining assets to other beneficiaries later, which may result in higher estate taxes. Families should consider their wealth and tax implications, consulting a professional to choose the trust that best fits their needs.
A financial advisor could help you create an estate plan to manage and distribute assets for your beneficiaries. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.
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