At the surviving spouse's death, the trust can distribute to children or named beneficiaries in a way that bypasses which tax?

At the surviving spouse's death, the trust can distribute to children or named beneficiaries in a way that bypasses which tax?

• A. Gift Tax
• B. Income Tax
• C. GST Tax
• D. Estate Tax

Answer: (D)

Using a bypass (credit shelter) trust is a common estate planning tactic to keep assets out of the surviving spouse’s estate so they aren’t taxed at the second death. By funding the trust with the deceased spouse’s exemption, the assets placed in it are not included in the surviving spouse’s estate. Then, when the surviving spouse passes away, the trust can distribute to children or named beneficiaries without those assets facing estate tax at that second death. So the tax that’s being bypassed is the estate tax. Gift tax relates to gifts made during life, GST tax to transfers across generations, and income tax concerns the taxation of the trust’s or beneficiaries’ income, not the death-time estate tax avoidance described here.

Using a bypass (credit shelter) trust is a common estate planning tactic to keep assets out of the surviving spouse’s estate so they aren’t taxed at the second death. By funding the trust with the deceased spouse’s exemption, the assets placed in it are not included in the surviving spouse’s estate. Then, when the surviving spouse passes away, the trust can distribute to children or named beneficiaries without those assets facing estate tax at that second death. So the tax that’s being bypassed is the estate tax. Gift tax relates to gifts made during life, GST tax to transfers across generations, and income tax concerns the taxation of the trust’s or beneficiaries’ income, not the death-time estate tax avoidance described here.