[[heard the term recently and was wondering if some kind Fool could offer insight? what is it, how does it work?]]Since I didn't see this term in context, I can only assume that they were talking about a "bypass" trust. If you are interested in estate planning using trusts, you really have to do some additional research. I'll be happy to provide you with reading references should you like to move on.But, very VERY simply, a bypass trust is used to take advantage of the the maximum unified estate/gift tax credit in order to reduce estate taxes.Example: Jack and Jill are married, and have about $1,250,000 in net assets. Jack and Jill have a "living trust" (it can be done in other ways...but this is the most popular right now) which deems that upon the death of the first to die, $625k will be left to the surviving spouse, and $625k will be left to a "bypass" trust. The earnings of the trust will accrue and be paid to the surviving spouse during her lifetime (assuming Jack dies first...but it works the same either way). After Jill dies, the balance of the trust principal is distributed based upon the terms of the trust. Since the $625k is inherited by the trust, the decedent (Jack in this case), does not pay any estate tax on these funds, since it does not exceed the maximum unified credit. And, the principal in this trust can grow in future years without any additional taxation on the principal growth after Jill passes on (although any earnings thrown off from this trust and paid to Jill will be taxable to her during her lifetime).The other $625k which was inherited by Jill directly (via the marital credit), will not be subject to estate taxes upon her death as long as the amount remains at or below $625k.Bottom line: If Jack dies without a bypass trust, he will leave all $1.25 million to Jill without estate taxes. But when Jill dies, she'll get a $625k exemption, but will have a taxable estate of $625k (and estate tax of about $200k). Why? Because Jack didn't use up ANY of his unified credit.But by using the bypass trust, Jack will use up his unified credit, and will pay no estate tax. Jill will also use up her unified credit and will pay no estate taxes. So some very simple estate tax planning could save Jack and Jill's beneficiaries over $200k in estate taxes.Again, this is a VERY simple example. If you want more reading on this subject, please let me know and I'll give you some references.TMF TaxesRoyWant to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
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