bypass trusts, b trusts or credit shelter trusts

March 18, 2022

John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank, talks with John Maher about bypass trusts. Also called B-trusts or credit shelter trusts, these trusts can be a helpful staple in estate planning.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today we're talking about bypass trusts, B trusts or credit shelter trusts, welcome John.

John Brennan: Hi John.

What Is a Bypass or Credit Shelter Trust?

John Maher: So John, what is a bypass or a credit shelter trust?

John Brennan: A credit shelter trust is a trust which uses someone's gift tax or estate tax exemption by directing assets into the trust for the full amount of their ability to pass assets free of estate tax.

So for instance, in Massachusetts, you have the ability to pass $1 million of your property free of estate tax. So how do you do that? If you need to, you create a bypass or credit shelter trust that receives that million dollars and then the remaining assets could potentially be subject to tax or as we just discussed with marital trusts, be directed into a marital trust. But that bypass trust… what that means is you are using your ability to pass assets free of an estate tax.

How Do You Create a Bypass Trust?

John Maher: Okay. And how do you create a bypass trust or credit shelter trust?

John Brennan: A bypass trust would be created in your overall trust by the trust terms. There would be an equation where the trustee is directed to fund the trust to the full amount that they can. So it's really created by the trust itself, it's not an individual type of trust. You don't go into your trust making by saying I want a bypass trust strictly. It comes about as a function of protecting your assets from tax in the trust terms.

How Do A- and B-Trusts Work Together?

John Maher: And these are sometimes called B-trusts, is that in relation to marital trusts or what we call A-trusts? How do they work together?

John Brennan: Well, and people threw these phrases A-trust B-trust around... I don't know if these are always called a B-trust. It depends on maybe where you went to law school, but the notion of the A-trust and the B-trust is really, you have that one trust that acts as the credit shelter. Everyone in Massachusetts can give away at death, a million dollars free of estate tax, that credit shelter trust accepts that first million and it bypasses the estate tax. So that's what the bypass trust is used for. That's what the bypass trust is good for. Then the remaining assets could potentially be subject to tax or go into another form of trust, such as a marital trust, or perhaps a trust that might benefit a charity. So the assets would not be taxed.

Tax Implications of a Credit Shelter Trust

John Maher: Can you tell me a little bit more about the tax implications of a credit shelter trust?

John Brennan: Well, the good thing about a credit shelter trust, like I said, each of us has the ability to pass a certain amount of assets tax free at death. The death tax or the estate tax is curious, in that you are taxed on the right of passing away your assets at death. So people are often surprised to learn that they receive a legacy or a gift from a decedent free of tax. Typically when you get new money, you think, well, there must be a tax on this. You get gambling winnings, they take taxes out before you even get the check. You get your salary and there's withholding tax, there's income tax.
So people think, well gee, here I am getting new money, doesn't that mean there's tax? No, the tax implications are borne by the decedent. So that bypass trust is where the taxing happens. And the bypass trust is part of the smart estate plan, which is protecting some of those decedent's assets when they pass away to make sure they get the most benefit they can for their loved ones.

Final Thoughts on Bypass Trusts

John Maher: So if you could just summarize your thoughts on bypass trusts or credit shelter trusts.

John Brennan: Bypass trusts come about as a product of a good estate plan, because they take advantage of existing laws in order for property to pass between generations while minimizing taxes. It's not cheating, it's not against the law. It's just a way to make sure that someone takes advantage of the laws on the books and protects their hard earned assets and passes them to the next generation.

John Maher: And do you have any final thoughts or tips, for people when they're using a bypass or credit shelter trust?

John Brennan: Nope. Because bypass trusts.... just as I sort of alluded to, bypass trusts come about, they're a tool, they're a utilitarian item. Bypass trusts can be directed in a vast number of ways. They are a trust themselves and they can be used in any way the trust maker, grantor, decedent sees fit. So the good thing is that they are taking advantage, they're using the tax laws advantageously, for the full benefit of the person passing away and the people who will receive the benefits of the trust.

Contact Cape Ann to Learn More

John Maher: All right. That's great information, John. Thanks again for speaking.

John Brennan: Sure thing John.

John Maher: And for more information, you can contact Cape Ann Savings Trust and Financial Services at (978) 283-7079 or visit the website at capeannsavings.bank.

Investments purchased from the Cape Ann Savings Trust and Financial Services Department are not FDIC-insured, not FDIC-guaranteed, not bank-guaranteed and may lose principal value.