What is a Bypass Trust and Do I Need One?

What Is a Bypass Trust Used For?

While married couples benefit from an unlimited marital deduction (meaning assets can pass to the surviving spouse free of estate tax), this only delays estate taxes until the second spouse passes away. Without proper planning, the surviving spouse’s estate could face a significant tax bill.

A bypass trust helps avoid this by taking advantage of the deceased spouse’s estate tax exemption. In 2025, New York State’s estate tax exemption is $7.16 million. If a couple’s combined assets are near or exceed this threshold, incorporating a bypass trust into their estate plan is worth considering.

Is a Bypass Trust Necessary in New York?

Bypass trusts are especially important for New York residents for two reasons:

• Use It or Lose It: New York does not allow the unused portion of a deceased spouse’s exemption to carry over. If it’s not used when the first spouse dies, it’s lost.
• No Portability: Unlike the federal system, which allows a surviving spouse to use any unused exemption through a process called “portability,” New York has no such provision.

Bypass Trust Benefits Explained With an Example

Let’s look at a simplified example: A couple has a combined net worth of $10 million. If the first spouse dies and all assets go directly to the survivor, the survivor’s estate may be subject to tax later. But if $5 million is placed in a bypass trust upon the first spouse’s death, those funds can grow and be used for the benefit of the surviving spouse, without being included in their taxable estate. The surviving spouse can still access income (and, if needed, principal) from the trust for the rest of their life.

Depending on the couple’s goals and financial situation, the estate plan can either require that a bypass trust be funded, or allow for flexibility so the surviving spouse and their advisors can make that decision after the first death.