Why Do We Have a Bypass and QTIP Trust in Our Revocable Living Trust?

At the death of the first spouse, estate plans for married couples sometimes divide assets into two trusts: a Bypass trust (also called a credit shelter trust) and a QTIP trust (Qualified Terminable Interest Property trust). Not all trust plans are drafted this way, and whether yours should be or not is a decision you should make with a licensed attorney.

 The Bypass trust is funded with an amount up to the deceased spouse’s estate tax exclusion (in 2025, that number is $13.99MM, but that number will likely decrease significantly in the future.) Those assets are now set aside for the benefit of the surviving spouse (and often children), but they are structured so they are not included in the surviving spouse’s estate when they later die. This allows the first spouse’s estate tax exclusion to be fully used instead of wasted. [Note: If there is additional unused estate tax exclusion amounts available to the deceased spouse, the surviving spouse can claim that unused amount (DSUE) and increase their own exclusion amount by that number.] Assets passing to beneficiaries from the Bypass trust will have received only a 1-time step-up in basis, calculated at the death of the first spouse. Some people refer to this as a 50% step-up in basis because it is not recalculated at the second spouse’s death.

The QTIP trust holds the remaining assets belonging to the deceased spouse that pass to the surviving spouse for their use during his or her lifetime. The surviving spouse typically receives all income from the trust for life, and the trustee may also distribute principal if allowed by the trust terms. These QTIP trust assets qualify for the marital deduction, so no estate tax is due at the first death, but unlike the Bypass trust, the QTIP trust assets will be included in the surviving spouse’s estate at his or her death. The key feature is control: the first spouse can decide who ultimately receives these assets (for example, children from a prior marriage), even though the surviving spouse benefits during life. Assets passing to beneficiaries from the QTIP trust will a 100% step-up in basis calculated at the death of the second spouse.

Used together, these trusts provide several important benefits. They can minimize or eliminate estate taxes, ensure both spouses’ tax exemptions are used, provide financial security for the surviving spouse, protect assets from creditors, and allow the first spouse to control the final disposition of assets. They are especially valuable for couples with larger estates, blended families, or concerns about asset protection and long-term planning.

If you’d like to learn more about the finer details inside a revocable living trust, we invite you to reach out to us at Vermillion Law in East Tennessee, New York, and Florida via our contact form.