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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鈥檚 estate could face a significant tax bill.

A bypass trust helps avoid this by taking advantage of the deceased spouse鈥檚 estate tax exemption. In 2025, New York State鈥檚 estate tax exemption is $7.16 million. If a couple鈥檚 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鈥檚 exemption to carry over. If it鈥檚 not used when the first spouse dies, it鈥檚 lost.
• No Portability: Unlike the federal system, which allows a surviving spouse to use any unused exemption through a process called 鈥減ortability,鈥� New York has no such provision.

Bypass Trust Benefits Explained With an Example

Let鈥檚 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鈥檚 estate may be subject to tax later. But if $5 million is placed in a bypass trust upon the first spouse鈥檚 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鈥檚 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.