How Does A Spousal Bypass Trust Work?

Senior married couples with assets acquired during their working years usually worry about how to distribute them when one or both of them dies. They have to think of how to set up living expenses for the one left behind. They also have to determine which portions the surviving spouse shouldn’t touch so they can leave something behind for their kids.  

What some couples do is set up a trust to get around—or to bypass—this concern. A spousal bypass trust (SBT) is a legal arrangement that establishes a way for a married couple to avoid paying estate taxes on some assets when one of them passes away. It’s also sometimes called an AB trust because of how it works. 

Introduction

When one of the spouses dies, all the assets of their estate are divided into two: the ‘A’ and ‘B’ trust. The ‘A’ trust refers to the marital trust. The ‘B’ trust, meanwhile, will function as the bypass or family trust. 

The marital trust is a part of the estate planning trust that can be revoked. This belongs to the surviving spouse. It’s a revocable trust because the person who set up the trust can change the terms and conditions of the revocable portion of the trust. However, the bypass portion of the trust is irrevocable, with terms and conditions that can no longer be changed.

When one of the spouses passes away, their common or mutual share of the estate is transferred into the family or B trust. They determine which assets go into the bypass trust when set up. 

The living spouse left behind isn’t considered as the owner of the assets under the bypass trust. He or she can’t sell or dispose of those assets, but he or she has access to them while alive. For instance, the surviving spouse can choose to live in a house that has been placed under the bypass trust but can’t sell it. He or she can also opt to have it rented out and receive the rent as income. 

The other portion of the estate, which isn’t placed under the family or bypass trust, is then placed under the A trust. This is the portion over which the surviving spouse has ownership and complete control. The surviving spouse can choose to sell it, assign, donate, give it away, and spend anything of it.

The surviving spouse doesn’t have to be the trustee of the bypass trust. He or she can designate somebody else as a trustee. Better yet, the couple can mutually draw up a list of their chosen trustees while both are still alive. When one spouse dies, that list is taken out to see who they named as their trustee. 

The trustee should ensure that all assets covered by the entire estate of the couple are divided according to the terms of the trust. He is also in charge of the management and maintenance of the assets, according to the terms and conditions of the trust.

Setting Up

Couples who wish to set up an SBT can ask a solicitor to draft one for them. There are also independent service providers who have ready-made templates of an SBT. They modify a few things to suit the circumstances and terms of prospective married clients. 

The married couple would also be asked to fill out an expression of wish form. This is the template form where they request that any death benefits received from their pension would be paid into the trust. The spouse who is a member or pension holder would appoint and instruct the trustee of the bypass trust. Instructions may also be given to the trustee on how the funds should be distributed upon their death.

When the trustor dies, the scheme manager or administrator would usually exercise discretion on where the death benefits will be paid. If the trustor executed and signed an expression of wish form, the scheme administrator would usually pay the death benefits to the trust if the trustor gave guidance or instruction to do so. If these benefits are not put in the trust, the trustees would ultimately do it following the wishes of the trustor.

Conclusion

The SBT is a legal arrangement that some couples set up to divide their estate into two parts. The first part is a trust for the living expenses of the spouse who will be left behind. The other part is a trust to preserve some of their assets so they can leave them behind for their kids. Eventually, the goal is to avoid confusion and family feuds in the future.