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What is an Exemption Equivalent Trust? A Comprehensive Guide
Definition & Meaning
An exemption equivalent trust, also known as a bypass trust, is a type of trust established through a decedent's will. This trust is designed to provide income to the surviving spouse while keeping the trust's assets out of the decedent's estate for tax purposes. By doing so, it allows the estate to qualify for the federal unified gift and estate tax credit, which can be equivalent to transferring up to $600,000 without incurring tax liabilities.
Table of content
Legal Use & context
Exemption equivalent trusts are primarily used in estate planning to minimize estate taxes. They are relevant in areas of law such as estate planning and tax law. Individuals often utilize these trusts to ensure that their surviving spouse receives financial support while preserving the estate's value for heirs. Users can manage the creation of these trusts using legal templates available through services like US Legal Forms, which provide guidance drafted by qualified attorneys.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: John passes away and leaves an exemption equivalent trust for his wife, Mary. The trust generates income for Mary, ensuring her financial security while keeping the trust assets from being taxed as part of John's estate.
Example 2: (hypothetical example) Sarah creates a bypass trust in her will, allowing her husband to receive income from the trust while preserving the principal for their children, thus reducing the overall estate tax burden.
State-by-state differences
State
Key Differences
California
Allows for specific exemptions based on community property laws.
New York
Has specific requirements for trust administration that may affect tax implications.
Texas
Utilizes different rules for marital property that can influence trust setup.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Description
Differences
Bypass Trust
Another name for an exemption equivalent trust.
No significant difference; both serve the same purpose.
Revocable Trust
A trust that can be altered or revoked by the grantor.
Exemption equivalent trusts are typically irrevocable once established.
Irrevocable Trust
A trust that cannot be changed after its creation.
Exemption equivalent trusts fall under this category but have specific tax benefits.
Common misunderstandings
What to do if this term applies to you
If you believe an exemption equivalent trust may be beneficial for your estate planning, consider the following steps:
Consult with a legal professional to understand your options and the implications of setting up such a trust.
Explore legal form templates from US Legal Forms to assist in drafting the trust document.
Review your overall estate plan to ensure it aligns with your financial goals and family needs.
Find the legal form that fits your case
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