Upon the first spouse’s death, the assets in the trust divide into two separate trusts, namely: the “Survivor’s Trust” and the “Bypass Trust”. The Bypass Trust will generally hold the deceased spouse’s assets which equal the available exclusion amount; and the Survivor’s Trust will hold the balance of the deceased spouse’s assets, if any (together with all of the surviving spouse’s interest in the trust’s assets).
The estate receives a marital deduction for the deceased spouse’s assets which are allocated the Survivor’s Trust. The assets allocated to the Bypass Trust are included in the deceased spouse’s taxable estate; however, since the amount of assets allocated to the Bypass Trust will not exceed the federal estate tax exclusion amount, the deceased spouse’s estate does not have any federal estate tax liability.
The surviving spouse has the right to receive all of the income from the Survivor’s Trust during his or her lifetime; and he or she may withdraw such amounts of the principal of the Survivor’s Trust at any time as he or she wishes.
The Bypass Trust generally provides that the surviving spouse will receive so much of the net income and principal thereof as the Trustee deems necessary or advisable for his/her proper health, maintenance and support.
Because the Bypass Trust becomes irrevocable upon the first spouse’s death and the surviving spouse’s rights to the assets in the Bypass Trust are limited to the rights granted to the surviving spouse by the trust agreement, the assets of the Bypass Trust (regardless of their value in the future) are not included in the taxable estate of the surviving spouse upon the surviving spouse’s death; but rather these assets are held, along with any assets remaining in the Survivor’s Trust, for the benefit of the couple’s children (and/or other beneficiaries).
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