A bypass trust is an irrevocable trust that springs into existence when the first spouse in a marriage dies, holding assets up to that spouse’s federal estate tax exemption so the money can grow and eventually pass to heirs without being taxed again at the surviving spouse’s death. For 2026, the federal exemption is $15 million per person, so 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 in 2026 is a different question, and for most couples the answer is no.
How a Bypass Trust Works
The trust begins as language inside a living trust or will that both spouses sign while they’re alive. Nothing is funded, and nothing is irrevocable, until the first spouse dies. At that point, assets up to the deceased spouse’s available exemption are moved into the bypass trust and the trust locks. The rest of the estate 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 doesn’t own what’s inside the bypass trust, but they’re not shut out of it either. The trust usually pays them its income, and it can distribute principal for their health, education, maintenance, and support. Estate planners call that the HEMS standard. It matters because unlimited access to principal would cause the IRS to treat the trust assets as part of the surviving spouse’s estate, undoing the tax benefit.3Cornell Law School. Credit Shelter Trust
When the surviving spouse later dies, whatever is left in the trust goes to the named beneficiaries, usually the couple’s children. Those assets were never part of the surviving spouse’s estate, so they are not taxed again, and any appreciation they experienced in the years between the two deaths escapes estate tax as well.2Legal Information Institute (LII) / Cornell Law School. Bypass Trust
What a Bypass Trust Does That Portability Doesn’t
Since 2012, a surviving spouse has been able to inherit the deceased spouse’s unused estate tax exemption just by filing IRS Form 706 within nine months of the death. That option, called portability, lets a couple protect the same $30 million without any trust at all.1Internal Revenue Service. What’s New – Estate and Gift Tax So the real question is what a bypass trust does that portability can’t.
Freezes Future Appreciation Out of the Estate
This is the biggest financial reason to use one. Assets that go into a bypass trust at the first spouse’s death are valued for estate tax purposes at that moment and never counted again. If $10 million in trust assets grow to $25 million by the time the surviving spouse dies, none of the $25 million is in the surviving spouse’s taxable estate. Under portability, those same assets stay in the survivor’s name and are taxed at their appreciated value. For estates likely to grow past the combined exemption, that difference can be worth millions.
Preserves the GST Exemption
The generation-skipping transfer tax applies when wealth passes to grandchildren or more remote descendants, and it carries the same 40% rate as the estate tax. Each person has a GST exemption equal to their estate tax exemption, but unlike the estate tax exemption, 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 vehicle for preserving both spouses’ GST exemptions for multigenerational planning.
Shelters Assets From State Estate Tax
Roughly a dozen states and the District of Columbia impose their own estate taxes, with exemptions far below the federal threshold. Oregon’s exemption 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 of these states don’t recognize it. Funding a bypass trust up to the state exemption at the first death can shelter those assets from state estate tax that portability would leave exposed.
Protects Assets From Creditors and Future Spouses
Because the surviving spouse doesn’t own the trust assets outright, those assets are generally shielded from the survivor’s creditors, lawsuit judgments, and anyone they later marry. In blended families this is often the real motivation. A bypass trust guarantees that the first spouse’s children will eventually receive the trust property, even if the surviving spouse remarries, hits financial trouble, or changes their mind about the inheritance plan. With a portability-only approach, the surviving spouse has full control and can redirect everything.
Insulates Against Remarriage and Law Changes
If the surviving spouse remarries and the new spouse also dies first, the portable exemption resets to whatever that most recent spouse left unused, which can wipe out the original transfer. A bypass trust avoids the problem because the first spouse’s exemption is already locked inside the trust. The $15 million exemption is now permanent under the One Big Beautiful Bill Act signed in July 2025,4Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax but permanent in tax law only means Congress hasn’t changed it yet. Assets already inside a bypass trust stay out of both estates regardless of what Congress does later.
The Capital Gains Downside
Bypass trusts carry an income tax disadvantage that catches a lot of families off guard. Normally, when someone dies, their assets 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, erasing the $400,000 of built-in capital gain.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Assets in a bypass trust get that step-up when the first spouse dies, because they’re included in that spouse’s estate. They do not get a second step-up when the surviving spouse dies, because the whole point of the trust is to keep them out of the survivor’s estate. If the trust assets appreciate significantly in the years between the two deaths, the children inherit potentially large unrealized gains that they’ll owe capital gains tax on when they sell.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
For estates well under the combined $30 million federal exemption, this trade-off can make a bypass trust actively counterproductive. You save nothing in estate tax, because none was owed, while handing your heirs a capital gains bill they wouldn’t otherwise face. That’s the main reason estate planners have moved away from writing bypass trust provisions into every married couple’s plan.
Ongoing Cost and Administration
A funded bypass trust is a separate legal entity. It needs its own tax identification number and its own annual tax return. Any domestic trust with gross income of $600 or more must file IRS Form 1041.6Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 Trust income tax brackets are also brutally compressed: in 2026, a trust hits the top 37% federal bracket at just $16,000 of retained income, while an individual doesn’t reach that rate until income is well over $600,000. Trustees often distribute income out to beneficiaries so it gets taxed at the beneficiary’s lower individual rate.
Drafting costs more than a simple will or basic revocable trust. Attorney fees vary with the complexity of the estate and the local market, but plans that include bypass trust provisions commonly run from several thousand dollars into the low five figures. If a professional or corporate trustee manages the trust after it’s funded, annual fees typically range from about 0.5% to 2% of trust assets. A surviving spouse can serve as their own trustee to save on fees, but if they’re both trustee and beneficiary, every distribution of principal has to stay inside the HEMS standard or the IRS can pull the trust assets back into their estate.
Who Actually Needs One in 2026
With the federal exemption at $15 million per person, the group of families who need a bypass trust purely for federal estate tax savings is small. A married couple with a combined estate under $30 million owes no federal estate tax regardless of how they plan, and for them the loss of the second step-up in basis usually outweighs any benefit.
A bypass trust still earns its keep when at least one of these is true: the estate is already large enough that future appreciation could push it past the combined exemption; the couple lives in a state with its own estate tax and a lower exemption; the plan needs to preserve GST exemptions for grandchildren; the couple wants the trust assets protected from the surviving spouse’s creditors; or blended-family dynamics require locking in who ultimately inherits.7Legal Information Institute (LII) / Cornell Law School. Credit Shelter Trust The honest answer in any given case comes from running the numbers with an estate planning attorney who can weigh the estate tax savings against the lost basis step-up and the long-term cost of administering the trust.