A Bypass Trust, also known as a Credit Shelter Trust, lets a married couple double the estate tax exemption.
For example, if the husband dies first, his assets fund a trust for the children up to the estate tax exemption amount (currently $5 million Federal and $4 million for Illinois). All remaining assets go to the widow in a second, separate trust. The first trust (the children’s trust) is drafted to allow the widow access to the principal for medical costs and other needs. This safeguards against the funds in the widow’s second, separate trust from being completely depleted and the widow running out of money without access to the funds in the first trust.
The advantage is that when the widow dies, she can pass on $5 million in assets Federal tax free ($4 million Illinois tax free) to the children. Also, the Bypass trust allows for another $5 million Federal ($4 million Illinois) in assets to be passed on tax free to the children.
Another benefit to the first spouse to die is that this arrangement ensures that the assets will go to the children and not a second spouse of the widow.
Please contact an estate planning law firm for further information.