Marital Trust vs Bypass Trust in California: What you need to know?
- Linda Varga
- 6 days ago
- 5 min read
Short Answer:
A marital trust and a bypass trust are both core tools in California estate planning, but they serve different tax, control, and asset‑protection goals for married couples. In many plans, they are used together in an “AB” or “ABC” structure so that a surviving spouse is provided for while still preserving estate tax exemptions and protecting assets for children or other heirs.
Introduction
Marital trust (often “Trust A” or QTIP‑type trust)
A marital trust is designed primarily to benefit the surviving spouse and to qualify for the federal estate tax marital deduction so that the estate tax is deferred until the surviving spouse’s death.
The surviving spouse typically has the right to all trust income for life and may also receive principal under standards set by the trust document.
Bypass trust (often “Trust B,” “credit shelter,” or “family” trust)
A bypass trust is funded at the first spouse’s death with an amount up to that spouse’s remaining estate tax exemption so that those assets are not taxed again when the surviving spouse later dies.
The surviving spouse is usually a beneficiary (often with children) but does not own the assets outright; the trust “bypasses” the survivor’s taxable estate at the second death.
How they fit into a California couple’s plan
For California married couples, especially those with significant real estate or business interests, a common approach has historically been to divide the estate into a marital trust and a bypass trust upon the death of the first spouse. Even though federal “portability” allows a surviving spouse to use a deceased spouse’s unused exemption in many cases, bypass trusts are still used to lock in the first spouse’s exemption, manage appreciation outside the survivor’s estate, and provide asset protection and control for children or other beneficiaries.
In community property situations, spouses often own most assets jointly; a well‑drafted trust can specify how this community property (and each spouse’s separate property) is allocated between the marital and bypass shares at the first death. The structure can also coordinate with California’s property-tax rules and basis-step-up rules, both of which are critical in planning for highly appreciated real estate.
Key differences at a glance
Feature: Primary purpose
Marital trust: Provide for the surviving spouse and defer estate tax.
Bypass trust: Use the first spouse’s exemption and avoid tax at the survivor’s death.
Feature: Estate tax treatment
Marital trust: Included in the surviving spouse’s taxable estate at death.
Bypass trust: Excluded from the surviving spouse’s taxable estate.
Feature: Main beneficiary
Marital trust: Surviving spouse, often with income rights for life.
Bypass trust: Surviving spouse and/or children and other heirs.
Feature: Control at second death
Marital trust: First spouse can control who ultimately receives assets only if trust is properly structured (e.g., QTIP).
Bypass trust: The first spouse can firmly control the ultimate beneficiaries in the trust terms.
Feature: Asset protection
Marital trust: Depends on design and survivor’s access; may be less protective if survivor can demand principal.
Bypass trust: Typically offers stronger protection from the survivor’s future creditors or divorces.
Feature: Flexibility for the survivor
Marital trust: Often higher, with more access/control for the survivor.
Bypass trust: Often more constrained to preserve tax and protection benefits.
How a marital trust works
A marital trust is typically funded with assets that either exceed what is needed to fully use the first spouse’s estate tax exemption or that the couple wants the surviving spouse to control more directly. The trust usually gives the surviving spouse all income for life, plus discretionary or standard‑based distributions of principal, and qualifies for the marital deduction, so there is no estate tax at the first spouse’s death (assuming a U.S.‑citizen spouse and other technical requirements).
At the surviving spouse’s death, the remaining marital trust assets are included in that spouse’s taxable estate and pass as directed, often to children, more remote descendants, or charities. In California, many couples choose a QTIP‑style marital trust so the first spouse can dictate the ultimate beneficiaries while still allowing the surviving spouse to enjoy income and support during life.
How a bypass trust works
The bypass trust is funded at the first spouse’s death with an amount up to that spouse’s remaining federal estate tax exemption (and sometimes GST exemption), shifting those assets out of the surviving spouse’s future taxable estate. The surviving spouse can still be a beneficiary, often with rights to income and limited principal distributions, but does not have unrestricted ownership.
Because the bypass trust is not part of the survivor’s taxable estate, any appreciation after the first death occurs outside of the survivor’s estate, potentially reducing estate tax at the second death. The trust can also serve as an asset‑protection and control device: it can ensure children from a prior relationship or designated heirs eventually receive the remaining assets, give some insulation from the survivor’s later creditors or divorces, and create a pool of resources that cannot be redirected by the survivor’s later will or new estate plan.
Common planning goals in California
Couples considering marital and bypass trusts often focus on several practical objectives, beyond pure tax savings:
Protecting children from blended‑family conflicts
A bypass trust can guarantee that certain assets are preserved for children from a prior marriage, even if the surviving spouse remarries or changes their own estate plan.
Preserving and managing California real estate
Carefully structuring which trust holds which properties can help balance property‑tax considerations, income needs for the surviving spouse, and long‑term asset protection for heirs.
Balancing flexibility and control
Marital trusts often give the survivor more flexibility, while bypass trusts preserve more control for the first spouse; the right mix depends on the couple’s comfort level and family dynamics.
When to revisit your plan
Even if a couple already has an older “AB” or “ABC” trust, it is important to revisit the plan due to changes in federal estate‑tax exemptions, portability rules, California property‑tax rules, and family circumstances such as remarriage, health changes, or a major increase in asset value. A modern review can determine whether strict mandatory splits into marital and bypass trusts still make sense or whether more flexible or “disclaimer‑based” structures are better suited to current net worth and goals.
This blog post is for general informational purposes only and does not constitute legal or tax advice. Married couples should consult with a qualified California estate‑planning attorney and appropriate tax professionals to evaluate whether a marital trust, bypass trust, or a combination is appropriate for their specific circumstances.
If you're looking to create or update your estate plan, it's important to consult with a legal professional who can help you navigate these complex trusts and create a strategy that works for your unique circumstances. Contact Moravec Varga & Mooney to speak with an expert in trusts and estate planning. We can help you implement a plan that secures your assets and provides for your loved ones.