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Q.What are the restrictions on a Bypass Trust?
A.There are two main requirements for a Bypass Trust to maintain its tax exemption. First, a bypass trust must limit the surviving spouse's power to access the assets of the trust. However, the surviving spouse may serve as the trustee of The Bypass Trust and is entitled to withdraw all of the interest and dividends earned in the trust annually, plus the greater of $5,000 or 5% of principal or per year for any purpose, plus any amount of principal so long as it is to provide for health, education, maintenance, or support.
The second restriction on a bypass trust is that it must limit the surviving spouse's power to distribute the trust assets at death. While you can allow the surviving spouse to name in his or her will specific persons who will succeed to the trust upon his or her death, the surviving spouse cannot be given the unfettered right to leave the balance of the assets in the Bypass Trust to his or her estate and estate creditors.
Although a bypass trust can be very flexible in practice, it must be drafted with absolute precision. The slightest drafting error can cost hundreds of thousands of dollars.
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