Married couples often ask:
Do we still need a Bypass Trust, or is portability enough?
Both strategies are designed to preserve estate tax exemptions between spouses — but they work very differently.
Understanding the difference between a Bypass Trust (Credit Shelter Trust) and Portability is key to deciding which approach fits your estate plan.
What Is a Bypass Trust?
A Bypass Trust (also called a Credit Shelter Trust) is created when the first spouse dies.
Here’s how it works:
- Assets equal to the deceased spouse’s estate tax exemption are placed into a trust.
- The surviving spouse may receive income (and sometimes limited principal).
- The trust assets are not included in the surviving spouse’s estate when they pass away.
- After the surviving spouse’s death, the assets pass to beneficiaries (often children).
The trust “bypasses” the surviving spouse’s taxable estate.
What Is Portability?
Portability allows a surviving spouse to use the deceased spouse’s unused federal estate tax exemption.
Instead of funding a trust:
- The executor files a timely estate tax return (Form 706).
- The unused exemption transfers to the surviving spouse.
- The surviving spouse can combine both exemptions later.
Portability was introduced to simplify estate planning for married couples.
Key Differences: Bypass Trust vs. Portability
1. Estate Tax Protection
Bypass Trust
- Locks in the deceased spouse’s exemption.
- Future appreciation of trust assets is excluded from the surviving spouse’s estate.
- Provides stronger protection against future tax law changes.
Portability
- Preserves unused exemption.
- Future appreciation of inherited assets remains in the surviving spouse’s estate.
- Dependent on timely filing.
Advantage for tax growth protection: Bypass Trust
2. Asset Protection
Bypass Trust
- Trust assets may be protected from:
- Surviving spouse’s creditors
- Lawsuits
- Remarriage complications
Portability
- Assets inherited outright are fully exposed to creditors.
Advantage for protection: Bypass Trust
3. State Estate Taxes
Many states have their own estate tax systems and do not recognize portability.
Bypass Trust
- May preserve state estate tax exemptions.
Portability
- Often does not apply at the state level.
Advantage in estate-tax states: Bypass Trust
4. Simplicity
Bypass Trust
- Requires trust administration.
- Separate tax ID and possible tax filings.
- Ongoing management.
Portability
- No ongoing trust administration.
- Simpler for modest estates.
Advantage for simplicity: Portability
5. Control Over Final Beneficiaries
Bypass Trust
- The first spouse controls where assets ultimately go.
- Helpful in blended families.
Portability
- Assets passing outright can be redirected by the surviving spouse.
Advantage for blended families: Bypass Trust
Example Scenario
Example 1: Moderate Estate, No State Estate Tax
A couple’s estate is below federal limits and they live in a state without estate tax.
Portability may be sufficient.
Example 2: Larger Estate With Growth Potential
A couple owns appreciating real estate and business interests.
A Bypass Trust may:
- Remove future appreciation from the taxable estate.
- Provide creditor protection.
- Preserve flexibility if exemption amounts decrease in the future.
Example 3: Second Marriage
If one spouse wants to ensure children from a prior marriage inherit certain assets, a Bypass Trust provides control that portability alone does not.
Can You Use Both?
Yes.
Many modern estate plans:
- Include a Bypass Trust structure.
- Allow flexibility to rely on portability if appropriate at the first death.
This approach builds in adaptability based on future tax laws.
The Bottom Line
Portability is simpler.
Bypass Trusts offer stronger tax control, asset protection, and long-term planning benefits.
The right choice depends on:
- Your total estate value
- Whether your state has estate taxes
- Your asset growth potential
- Blended family considerations
- Asset protection concerns
- Comfort with administrative complexity
Because estate tax laws can change, building flexibility into your estate plan is often the smartest approach.
If you are reviewing your estate plan or planning as a married couple, understanding whether a Bypass Trust, Portability, or a combination of both fits your goals is an important next step.
