Disclaimer Trust vs. Bypass Trust

Find out the key differences between Disclaimer Trusts and Bypass Trusts with Kevin C. Martin, Attorney at Law, PLLC. Call us for more information.

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What Are Disclaimer and Bypass Trusts?

Estate planning is crucial for families and individuals who want to ensure their assets are handled and distributed according to their wishes. Central to this process is choosing the right trust—a decision that significantly shapes both the protection of assets and their eventual transfer. 

In this article, we’ll present two types of trust: disclaimer and bypass. Each comes with unique advantages, intricacies, and suitability based on individual circumstances.

A disclaimer trust offers flexibility and tax advantages for married couples. Its purpose is to allow the surviving spouse to refuse or disclaim assets that are part of their inheritance. The disclaimed assets are then passed to the trust.

A bypass trust, also known as an AB Trust, is designed to minimize estate taxes and maximize estate tax exemption for married couples. After one spouse dies, the deceased spouse’s share of the estate transfers to the trust. The surviving spouse may get income from the trust assets, but the beneficiaries inherit the assets after the surviving spouse’s death.

While setting up a trust can be a great way to manage your property, it involves following several requirements and formalities to create a valid document. Since your family’s future may be at stake, consulting an estate planning attorney may be beneficial. Whether you need help drafting an irrevocable trust or a revocable trust, estate planning attorneys at Kevin C. Martin, Attorney at Law, PLLC, can help.

Understanding Trusts in Estate Planning

Trusts are cornerstone elements in the realm of estate planning, serving as sophisticated tools for managing and safeguarding one’s assets. These legal arrangements allow individuals to delineate how their property and funds should be handled both during and after their lifetime.

What is a Trust?

A trust is an estate planning tool created to manage and protect assets. The person creating a trust is known as a grantor or the settlor in DC. In a trust, the settlor gives the trustee the right to manage trust assets for the benefit of one or more beneficiaries.

The settlor sets out the terms of the trust and decides which trust assets they will receive and under which conditions. For more detailed information, check DC Courts on Trusts.

The Role of Trusts in Asset Management and Protection

Trusts offer a high degree of control over the distribution of one’s estate and provide the added benefits of privacy and potential tax advantages.

Along with asset protection, trusts make the transfer of assets much more straightforward and hands-free than a will. In other words, with a trust, beneficiaries may be able to avoid probate and gain access to assets faster than if assets were transferred via a will.

Disclaimer Trusts Explained

A disclaimer trust is a type of revocable trust. This type of trust is used when asset protection from creditors or minimizing an estate tax is a priority.

Definition and Purpose of a Disclaimer Trust

A disclaimer trust is an estate planning tool specifically for a married couple. It is established within a will or revocable living trust and allows individuals to maximize benefits for their beneficiaries while maintaining flexibility.

The trust is funded if the surviving spouse disclaims (refuses) the distribution of specific assets following the deceased spouse’s death. The spouse doesn’t have to refuse all their inheritance; instead, they can only refuse a part.

The disclaimer trust can be beneficial if the spouses’ combined estate value exceeds the federal estate tax exemption amount. By disclaiming assets, the overall taxable estate value is reduced. At the same time, disclaimed assets are protected from potential creditors or legal claims.

How Disclaimer Trusts Work

When creating the disclaimer trust, you can follow these steps:

  • Determine which assets will be placed in the trust

  • Consult an estate planning attorney

  • Designate the trustee and the beneficiaries

  • Determine the terms of the trust

  • Update the trust if needed

However, before setting up a disclaimer trust, it’s crucial to understand its purpose, benefits, and legal requirements. It’s also essential to evaluate the tax implications. Setting up a disclaimer trust can be complicated, so consulting with a skilled estate planning attorney can be beneficial. They can help minimize state estate tax and reduce the tax burden of the designated beneficiaries.

Bypass Trusts Explained

A marital bypass trust, or an AB trust, is an estate planning legal arrangement that allows married couples to minimize or completely avoid estate tax on certain assets when one spouse dies.

Definition and Purpose of a Bypass Trust

With a bypass trust, when one spouse passes away, the estate’s assets are split into two separate trusts:

  • Marital trust (A trust) – revocable trust belonging to the surviving spouse

  • Family or bypass trust (B trust) – irrevocable trust

When the first spouse dies, their share of the estate goes into the bypass trust. The surviving spouse doesn’t own bypass trust assets but can receive income from that trust during their lifetime.

The portion of the estate that doesn’t go into the bypass trust is placed into the marital trust, over which the surviving spouse has complete control. Assets in a marital trust aren’t subject to federal or state estate tax. Assets contained in the bypass trusts can be passed on to children or grandchildren of the deceased spouse.

How Bypass Trusts Work

Creating the bypass trust is almost identical to creating the disclaimer trust. Couples with estates valued at more than $13.61 million, the size of the federal estate tax exemption, most often use bypass trusts.

Furthermore, holding assets in a bypass can be used in proactive planning to avoid probate.

Comparing Disclaimer Trusts and Bypass Trusts

Both bypass and disclaimer trusts prevent the deceased spouse’s assets from becoming a part of the surviving spouse’s estate. But there are certain differences between them.

Key Differences

The disclaimer trust allows the surviving spouse to disclaim certain assets that are part of their inheritance, reduce their estate tax liability, and provide for the trust beneficiaries.

But, while a disclaimer trust relies on the surviving spouse’s decision to disclaim assets, a bypass trust provides additional control over asset allocation.

However, since bypass trusts are usually irrevocable, assets placed in them won’t be under the surviving spouse’s control. It’s crucial to ensure the settlor leaves enough assets out of that trust so the surviving spouse would be financially provided for.

Choosing the Right Trust for Your Needs

Deciding whether to include a bypass or a disclaimer trust in your estate plan can be challenging. Consulting with an experienced lawyer who understands DC revocable living trusts as well as irrevocable trusts may help you decide which will be better suited for your situation.

Need Help Choosing Between Disclaimer and Bypass Trust? Contact Us Today!

If you want to set up a bypass or a disclaimer trust or have any questions, get in touch with Kevin C. Martin, Attorney at Law, PLLC, today.

We have experience in setting up many estate planning tools. Moreover, we can help you choose and create a trust that reflects your needs and protects your family.