Tax Saving Techniques - By-Pass Trust

A tax sheltered trust is established in order to maximize the amount of property passing to your children upon the last to die of you and your spouse. This is usually accomplished by setting out $1,500,000 of the first estate in a “tax sheltered trust”.

The Trustees usually have discretion to pay income and principal to the survivor (and perhaps your children). This tax sheltered trust usually results in a savings in federal and state inheritance taxes. In addition, the survivor is usually given a "second look" power of appointment to decide how property remaining in the trust will be distributed among your children at the second death. This trust would be protected from estate tax both at the first death and at the survivor’s death.

The balance of the estate (that remaining after the exemption is funded) would be left to or in trust for the surviving spouse. If held in trust, the survivor would receive all of the income, together with any principal needed for support. One consideration in establishing such a trust is that using the format of the Qualified Terminable Interest Property (QTIP) Trust, which ensures that any property of the first spouse to die remaining at the survivor’s death would pass to your own descendants and not to those of a successor spouse or others. It is also possible to shelter and pass more property to your grandchildren (utilizing a generation skipping tax exemption to “skip” a generation of taxation) if the QTIP trust is used.