A bypass trust is an irrevocable trust that springs into being when the first spouse in a marriage dies, funded with assets up to that spouse’s federal estate tax exemption so the assets and their future growth eventually pass to heirs free of estate tax. With the federal exemption at $15 million per person for 2026, a married couple using bypass planning can shelter up to $30 million from the 40% federal estate tax.1Internal Revenue Service. What’s New – Estate and Gift Tax Whether you actually need one is a different question, and for most married couples in 2026 the answer is no.
How a Bypass Trust Works
The trust starts as language in a living trust or will drafted while both spouses are alive. Nothing happens with it until the first spouse dies. At that point, assets up to the deceased spouse’s available exemption move into the bypass trust, which becomes irrevocable. Anything above that amount typically passes to the surviving spouse outright or into a separate marital trust.2Legal Information Institute (LII) / Cornell Law School. Bypass Trust
The surviving spouse does not own the assets inside the bypass trust, but they aren’t cut off from them. The trust usually pays income to the surviving spouse and permits principal distributions for health, education, maintenance, and support. Estate planners call that the HEMS standard, and it matters because it keeps the trust assets out of the surviving spouse’s taxable estate. Give the surviving spouse unlimited access to principal and the IRS treats the assets as theirs, which defeats the whole point.3Cornell Law School. Credit Shelter Trust
When the surviving spouse later dies, whatever remains in the trust passes to the named beneficiaries, usually the couple’s children. Those assets were never part of the surviving spouse’s estate, so they aren’t taxed again. Any appreciation since the first spouse’s death also escapes estate tax.2Legal Information Institute (LII) / Cornell Law School. Bypass Trust
The Simpler Alternative: Portability
Since portability became permanent in 2012, a married couple can protect both exemptions without any trust at all. The executor of the first spouse’s estate files IRS Form 706 within nine months of death (with a possible six-month extension) and elects to transfer the deceased spouse’s unused exclusion, called the DSUE, to the survivor. The surviving spouse then adds that amount to their own exemption. At today’s $15 million per-person figure, that’s up to $30 million of federal shelter without an irrevocable trust or its ongoing paperwork.1Internal Revenue Service. What’s New – Estate and Gift Tax
For many couples, portability is cheaper and cleaner. But it has real limits, and those limits are where bypass trusts still earn their keep.
When a Bypass Trust Still Makes Sense
Freezing Appreciation
Assets that go into a bypass trust are valued for estate tax purposes at the first spouse’s death and then removed from the tax picture. If $10 million grows to $25 million by the time the surviving spouse dies, none of that $25 million is in the survivor’s taxable estate. Under portability, those same assets would remain in the surviving spouse’s name and be taxed at their appreciated value. For estates likely to grow past the combined exemption, this is the single largest reason to use a bypass trust.
Preserving the GST Exemption
The generation-skipping transfer tax hits wealth passing to grandchildren or more remote descendants at the same 40% rate as the estate tax. Each spouse has a GST exemption equal to their estate tax exemption, but the GST exemption is not portable. If the first spouse dies without allocating it to a trust, it’s gone. A bypass trust is the standard way to preserve both spouses’ GST exemptions for multigenerational planning.
State Estate Tax
Roughly a dozen states and the District of Columbia impose their own estate taxes with exemptions well below the federal level. Oregon’s is $1 million, Massachusetts sits at $2 million, and New York’s is $7.35 million for 2026. Portability is a federal concept and most states don’t recognize it. A bypass trust funded up to the state exemption at the first death can shelter those assets from state estate tax on top of any federal benefit.
Blended Families and Creditor Protection
Because the surviving spouse does not own bypass trust assets outright, those assets are generally shielded from the survivor’s creditors, lawsuit judgments, and future spouses. In second marriages, a bypass trust ensures the first spouse’s children eventually receive the trust assets even if the surviving spouse remarries, faces financial trouble, or changes their mind about who should inherit. Under portability, the surviving spouse has full control and can redirect everything.
Remarriage Risk
If the surviving spouse remarries and the new spouse also dies first, portability gets messy. The survivor’s DSUE resets to whatever the most recent deceased spouse left unused, which can wipe out the original first spouse’s ported exemption. A bypass trust avoids that risk because the first spouse’s exemption is already locked inside the trust.
Insurance Against Law Changes
The $15 million exemption is now permanent under the One Big Beautiful Bill Act signed in July 2025, which replaced the temporary TCJA increase and removed the scheduled drop back to roughly $7 million.4Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax Permanent in tax law means until Congress changes it. A funded bypass trust removes assets from both estates regardless of what a future Congress does; portability is only as good as the law in force when the surviving spouse dies.
The Cost Basis Trade-Off
Here is the reason estate planners no longer put bypass provisions in every married couple’s plan. When someone dies, their assets generally receive a step-up in cost basis to fair market value at the date of death. Stock bought for $100,000 and worth $500,000 at death passes to heirs with a $500,000 basis, and the $400,000 of appreciation escapes capital gains tax.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Bypass trust assets get a step-up when the first spouse dies. They do not get a second step-up when the surviving spouse dies, because they were deliberately kept out of the surviving spouse’s estate. That’s the design. If the assets appreciate significantly between the two deaths, the beneficiaries inherit potentially large unrealized capital gains.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
For an estate well under the combined $30 million federal exemption, a bypass trust can save nothing in estate tax (because none was owed) while creating a capital gains bill the heirs would not otherwise face. That is the wrong trade for most couples.
Ongoing Cost and Administration
A bypass trust is a separate legal entity with its own tax ID and its own paperwork. Any domestic trust with gross income of $600 or more must file IRS Form 1041, the fiduciary income tax return.6Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 Trust income brackets are compressed: in 2026, a trust hits the top 37% federal rate at just $16,000 of income, while an individual doesn’t reach that rate until well over $600,000. Trustees often distribute income to beneficiaries so it’s taxed at the beneficiary’s lower individual rate.
Drafting an estate plan with bypass trust provisions costs more than a simple will or basic revocable trust. Attorney fees vary by market and complexity but commonly run from several thousand dollars into the low five figures. If a professional or corporate trustee manages the trust after funding, annual fees typically fall between about 0.5% and 2% of trust assets. The trustee has to invest prudently, keep trust assets separate, maintain records, file returns, and stick to the trust terms on distributions. Where the surviving spouse serves as both trustee and beneficiary, distributions have to stay within the HEMS standard or the assets get pulled back into the taxable estate.
Who Actually Needs One in 2026
With a $15 million per-person federal exemption, most married couples do not need a bypass trust for federal estate tax reasons. A combined estate under $30 million owes no federal estate tax regardless of how the plan is structured, and portability handles the paperwork side. For those families, the step-up basis loss usually outweighs anything a bypass trust would accomplish.
A bypass trust is still the right tool if any of these apply: the estate is large enough that appreciation could push it past the combined exemption, the couple lives in a state with its own estate tax and a much lower exemption, multigenerational planning requires preserving GST exemptions, creditor protection for the surviving spouse’s share is a priority, or a blended family needs a guarantee that specific assets reach specific heirs.7Legal Information Institute (LII) / Cornell Law School. Credit Shelter Trust Run the numbers with an estate planning attorney who can weigh the projected estate tax savings against the lost second step-up and the cost of running a trust for decades.