Do I Need a Bypass Trust?

When clients ask whether they need a bypass trust, the first step is to clarify the concern they are trying to address. There are two very different issues:

Am I worried about estate taxes?
Am I worried about making sure my spouse doesn’t change the trust after I pass away?

1. If the Concern is Estate Taxes

For most families, you can protect the full combined estate tax exemption — currently around $30 million per couple — whether you use a bypass trust or a simpler approach called portability.

Bypass trust: At the first spouse’s death, a bypass trust is funded with the deceased spouse’s exemption amount. These assets stay outside the surviving spouse’s estate. The tradeoff is that they do not receive a second “step-up” in tax basis when the survivor dies. That can lead to significant capital-gains tax later.
Portability (Form 706): Instead of funding a bypass trust, the survivor can file Form 706 to claim the deceased spouse’s unused exemption (called DSUE). The survivor then has both their own exemption and the DSUE. Because the assets remain in the survivor’s estate, they qualify for a second step-up in basis at death — wiping out capital gains.

Bottom line: Both approaches preserve the full exemption amount. The key difference is that a bypass trust misses the second step-up, while portability preserves it and avoids complex trust administration.

2. If the Concern is Control

Some clients are less worried about taxes and more focused on making sure their children (or other beneficiaries) actually inherit their share.

The weakness of bypass trusts:
- In many designs, the surviving spouse can choose which assets fund the bypass trust. Attorneys often recommend putting in cash to avoid capital-gains complications. But cash is also the most likely asset to be spent — leaving little for the children.

A better approach:
- Our trusts allow you to lock in specific, traceable assets (such as a house or brokerage account) that will pass to your beneficiaries. These assets are easier to track, less likely to be spent during life, and they still qualify for a step-up in basis at the survivor’s death.

Bottom line: If your main goal is protecting your children’s inheritance, a carefully designed spousal restriction trust works better than a bypass trust.

What About a QTIP Election?

Some clients ask:

“My last attorney said I could take a QTIP election and still get a step-up for capital gains.”

That is true.

A QTIP trust requires that all income go to the surviving spouse for life. The assets are then included in the survivor’s estate, which means they get a step-up in basis.
Some trusts are drafted to let the executor choose: treat it as a bypass trust (excluded from the estate), or elect QTIP treatment (included, with step-up).

Bottom line: A QTIP election adds flexibility, but it doesn’t double your exemption (that’s done through portability).

Why Our Spousal Restriction Trust is Better

Our design improves on both the bypass and QTIP models:

All assets pass to the surviving spouse, but the spouse cannot change the beneficiaries.
Because the assets are counted in the survivor’s estate, they qualify for the second step-up in basis at death
At the same time, the survivor can file Form 706 to elect portability and preserve the deceased spouse’s unused exemption. This effectively doubles the couple’s exemption without needing a bypass trust.

We recommend choosing traceable assets (like a home or brokerage account) for restriction, since they are less likely to be spent during life, making it much more likely the children inherit them intact.

Bottom line: This approach secures your children’s inheritance, preserves the step-up in basis, and allows you to capture both spouses’ estate tax exemptions in the simplest way.

Example: Why the Second Step-Up in Basis Matters

Imagine a couple owns a house worth $2,000,000 when the first spouse dies. Their original purchase price was $500,000.

At the first spouse’s death, the basis is “stepped up” to $2,000,000.

Ten years later, the house has grown to $3,500,000.

If the house is in a Bypass Trust:

Basis stays frozen at $2,000,000.
When the children inherit and sell for $3,500,000, they face tax on the $1,500,000 gain.
At combined federal and California rates (~39%), that’s about $585,000 in tax.

If the house is in a Portability/Spousal Restriction Trust:

At the survivor’s death, the basis resets again (second step-up) to $3,500,000.
Children inherit with no taxable gain.
If sold immediately, no capital-gains tax is due.

Final Takeaway

Bypass trusts and portability both preserve the estate tax exemption. But bypass trusts come at a cost — no second step-up in basis, and often less protection for children.

Our spousal restriction trust format combines the best of both worlds:

Double the exemption (through portability),
Full basis step-up,
Locked-in inheritance for your beneficiaries.

In real terms, this can mean saving your heirs hundreds of thousands of dollars in unnecessary tax

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