Bypass Trusts: What They Are, Who Needs One, and How They Work in New York

What You Should Know Before Making a Decision

When the term “bypass trust” comes up, people often assume it’s either an essential tax-saving strategy or an overly complicated trust document they’ll never actually need. For most families, the truth falls somewhere in between. Here’s what really matters as you think through your options.

First, a bypass trust doesn’t shut your surviving spouse out. When drafted thoughtfully, the trust can provide meaningful support for a surviving spouse through clear, workable guidelines—often using distribution standards like “health, education, maintenance, and support” (known as HEMS)—while still keeping remaining trust assets on track for your long-term goals, such as making sure children ultimately inherit.

Second, New York tax law is the reason this topic keeps coming up for families in the state. At the federal level, portability allows a surviving spouse to use a deceased spouse’s unused exemption as long as the executor files the right paperwork with the IRS. But New York offers no portability at all. If the first spouse’s New York exemption isn’t “used” through a bypass trust or similar approach, it’s typically lost for good.

Third, the real question isn’t whether you like trusts—it’s what problem you’re trying to solve. If your taxable estate is near New York’s exemption threshold, you have a blended family, you own a business or valuable real estate, or your asset titling is complicated, getting professional advice sooner rather than later makes sense. On the other hand, if you’re comfortably below the exemption with a straightforward beneficiary plan, focusing on the fundamentals first—wills, beneficiary designations, and powers of attorney—is a perfectly reasonable approach. Trust planning can always be layered in later as your circumstances evolve.

This article walks through how a bypass trust works, who may benefit from one, and the practical steps that separate a plan that succeeds from one that falls short. If you’d like a personalized conversation, Rachel K. Ziegler, Esq. and the team at NY Wills & Estates focus exclusively on estate planning in New York and New Jersey—two states where portability rules and tax differences regularly shape families’ planning decisions.

Could a Bypass Trust Make Sense for You?

Not every family needs a complex trust structure, and the fastest way to figure out your best next step is to separate “I need legal guidance soon” from “I should gather more information first.”

You’ll want to schedule a consultation with an estate planning attorney relatively quickly if you own substantial non-probate assets—things like a closely held business, investment properties, large taxable brokerage accounts, or life insurance structured in a way that makes it includable in your taxable estate. These assets pass outside your will and must be carefully coordinated with your overall estate plan to achieve your goals. You should also act promptly if you have blended-family concerns, such as a second marriage, stepchildren, or children from a prior relationship, and you want to support your surviving spouse without risking unintentional disinheritance later.

If neither situation applies, your best next step is preparation, not rushing into a trust. Pull together basic financial information—your assets, their approximate values, and how each one is titled—then evaluate whether you’re safely under New York’s threshold or somewhere in the uncertain middle ground. A simple calculation can help: add up what you own (real estate, retirement accounts, life insurance if includable in your estate), subtract debts, and compare the total to the current New York exemption amount. If you’re close to the threshold or unsure what counts, a professional review is worthwhile.

Because New York and New Jersey rules diverge—sometimes dramatically—many families benefit from counsel that can coordinate estate planning across both states. NY Wills & Estates is licensed in both New York and New Jersey and focuses exclusively on estate planning, keeping your conversation centered on strategies that fit your actual circumstances rather than a generic template.

Understanding New York’s Estate Tax Exemption and the Portability Gap

For deaths occurring on or after January 1, 2024, New York’s estate tax exemption stands at $7,160,000 per person (this exclusion amount adjusts periodically for inflation). The federal estate tax exemption sits significantly higher at $13.61 million per person in 2024.

Note: Exemption amounts and filing requirements change periodically. Confirm current New York figures with the New York Department of Taxation and Finance before finalizing any plan.

Here’s where this gets practical. Federal portability allows a surviving spouse to use a deceased spouse’s unused federal estate tax exemption—but only if the executor files a timely IRS Form 706, even when no federal tax is actually due. New York has no portability at all. Without a bypass trust or similar technique to “use” the first spouse’s New York exemption, families can unintentionally waste that exemption and leave the surviving spouse’s estate facing a substantial tax liability.

New York also has a particularly harsh estate tax “cliff” that catches many families off guard. If the taxable estate exceeds 105% of the exemption amount, the entire exemption disappears, and the estate gets taxed on its full value—not just the excess. This cliff can turn a modest overage into a six-figure tax problem.

Finding Your Path: Is a Bypass Trust Right for Your Family?

Most New York married couples find themselves in one of three practical situations. The goal here is pointing you toward your best next step—not pushing everyone toward the same trust structure.

If you’re not sure where you fall, guessing isn’t the answer. Build an accurate balance sheet that includes commonly overlooked assets like life insurance ownership, business equity, and out-of-state real estate.

Five Factors That Shape Your Decision

Estate planning attorneys typically evaluate bypass trust fit using a practical framework built around five considerations: the size of your taxable estate, portability rules, your intended inheritance and family dynamics, cost and complexity, and execution (setup and funding). Here’s how each plays out in practice.

Estimating Your Estate’s Value

Start with a complete inventory—not just what passes through probate under a will. Include real estate (even out-of-state property), bank and brokerage accounts (both taxable and retirement), business interests, and life insurance when proceeds are includable in your taxable estate based on ownership or other factors.

Consider this example: A Brooklyn brownstone valued at $2.5M plus a $2M brokerage account puts a family at $4.5M before counting retirement accounts, insurance, or any business interest. Property values and markets shift, so many families update these numbers annually—especially in neighborhoods where appreciation can be meaningful over short periods.

Understanding New York’s Portability Gap

In New York, if you leave everything outright to a surviving spouse using the unlimited marital deduction without any additional planning, you risk losing the first spouse’s New York exemption entirely. At the second spouse’s death, the combined estate could be taxed as if only one exemption ever existed. That can translate into a substantial New York estate tax bill—particularly if the surviving spouse’s estate lands in or near the cliff range.

Choosing Beneficiaries and Distribution Rules

A bypass trust often tries to balance two goals that can pull in opposite directions: supporting a surviving spouse while protecting what passes to children, including children from prior relationships.

The surviving spouse typically receives income and, depending on how the trust is drafted, principal distributions under standards like HEMS. Some plans include practical provisions allowing the trustee to cover housing costs, insurance, and routine household expenses so the spouse isn’t forced to negotiate every bill.

Children or other beneficiaries often receive what remains at the surviving spouse’s death, reducing the risk of unintentional disinheritance in blended-family situations. The trustee manages investments, makes distributions according to the terms of the trust, and handles administration. A common decision point: should the trustee be the surviving spouse, a trusted family member, a co-trustee structure, or an independent professional?

Weighing Costs and Complexity

*These ranges are illustrative and vary based on estate complexity, firm, and geographic location within the region.

These costs can be well worth it when the trust prevents a meaningful New York estate tax bill or solves a blended-family control issue. But if your estate is far below the exemption, ongoing administration may create more friction than benefit—especially if the trust will run for many years.

One point that trips people up: Retirement accounts are generally includable in your gross estate for estate tax purposes even though they’re tax-deferred for income tax purposes. They can qualify for the marital deduction if left to a spouse in a qualifying manner, but they’re not excluded from your taxable estate simply because they’re retirement assets.

If your priorities are clarity, guardianship, and smooth asset transfers rather than state estate tax savings, you may be better served with strong wills, beneficiary designation review, and incapacity documents—layering in trust planning only when the numbers or family dynamics genuinely justify it.

Getting Setup and Funding Right

A bypass trust can only achieve its intended benefits if trust assets actually flow into it as planned. That means aligning property titles (including deeds for real estate), beneficiary designations (life insurance, retirement accounts, transfer-on-death registrations), account ownership and “payable on death” instructions, and documentation so a future trustee can establish what happened and why.

One of the most common reasons estate plans fail is surprisingly mundane: the trust documents were signed, but the assets were never properly positioned to follow the plan.

How a Bypass Trust Actually Works

Bypass trust planning is typically built into a married couple’s wills or revocable living trust plan and becomes operational after the death of the first spouse.

In a will-based plan, the bypass trust is often funded through the probate estate under the will’s trust provisions. In a revocable trust plan, assets may already be held in the revocable trust, and the bypass subtrust is created and funded at death. Some estate plans use an AB trust structure where the decedent’s assets are split into separate trusts—the bypass trust (B trust) and a marital trust (A trust) or survivor’s trust—each serving different purposes. Either way, what matters is that assets are actually allocated into the bypass trust, in the right amounts, and within required deadlines.

When the first spouse dies, the bypass trust becomes irrevocable—meaning it generally cannot be changed. This irrevocable trust status is what removes the assets from the surviving spouse’s taxable estate. Assets are allocated into the trust, often using a formula designed to capture up to the New York exemption without triggering the cliff. A trustee then takes over: managing trust assets, making distributions to the surviving spouse as permitted, and handling required tax and trust reporting.

What does the trustee actually do? They collect and safeguard trust property, obtain date-of-death values (often requiring appraisals for real estate or business interests), manage liquidity and cash flow so bills, taxes, and spouse support can be paid on time, coordinate required filings (estate tax return and ongoing trust income tax return), and communicate with beneficiaries to maintain a clear paper trail.

Execution matters—a lot. Good planning includes careful valuation (sometimes with appraisals), coordinated deadlines (estate tax returns are typically due within 9 months of death unless extended), and strict adherence to written terms.

Key drafting provisions that shape real-life outcomes include naming successor trustees, deciding whether an independent trustee must approve distributions, defining discretionary distribution standards (like HEMS), giving the surviving spouse limited powers that won’t pull trust assets back into the surviving spouse’s estate, and including clear instructions for allocating taxes and expenses between the trust and the rest of the estate.

For families who want trust benefits without unnecessary complexity, the key is tailoring. Distribution standards, trustee structure, and funding instructions should match your real-world needs—cash flow, the surviving spouse’s comfort with shared control, family dynamics, and the types of trusts that fit your assets. Working with attorneys who focus on trusts and estate planning, rather than general practice, can make a meaningful difference in outcomes.

Real-Life Examples: When Bypass Trusts Help—and When They May Not

Larger Estate: Tax Savings May Be Significant

Mark and Lisa own: a Manhattan condo ($4M), an investment portfolio ($2.5M), a family business ($1.8M appraised), and life insurance owned by Mark ($750,000). Their total comes to approximately $9.05M.

If the first spouse leaves everything outright to the survivor, the first spouse’s New York exemption may be wasted. Depending on timing, growth, available deductions, and the cliff’s impact, the surviving spouse’s later taxable estate could face a New York estate tax liability in the hundreds of thousands of dollars. With a properly structured bypass trust, the family may achieve significant tax savings while creating a clearer plan for business continuity and inheritance. Actual results depend on many factors, including asset values at the decedent’s death and how carefully the plan is administered.

Smaller Estate: Simplicity Often Wins

Susan and Alan have: a co-op apartment ($900,000), 401(k) and IRAs ($850,000 with beneficiary designations to each other), and joint savings ($200,000). Their total comes to approximately $1.95M.

A bypass trust is unlikely to generate tax savings here. Their estate planning priorities should be simpler: up-to-date beneficiary designations, a well-drafted will, and solid incapacity documents (health care proxy and power of attorney). They can revisit the plan if they later inherit assets or acquire additional property.

New York vs. Federal Estate Tax: Key Differences

Both systems tax transfers at death, but the timing and filing mechanics are what drive estate planning decisions. Understanding how gift tax, capital gains tax, and step-up in basis rules interact with estate tax law is essential for optimizing your overall plan.

One important benefit: Assets held in a bypass trust generally receive a step-up in basis at the first spouse’s death, which can reduce or eliminate capital gains tax when the trustee later sells appreciated assets. This step-up benefit is a key reason bypass trusts remain valuable even for estates primarily concerned with income taxes rather than estate taxes.

Is a Bypass Trust Worth It? A Cost-Benefit Framework

The simplest way to decide is comparing expected tax savings and family-protection value against setup and lifetime administration costs.

For low exposure situations (well below the New York exemption), a bypass trust usually doesn’t pay for itself in tax savings. The value may lie in non-tax benefits like blended-family protection or asset protection. Weigh that against ongoing administration and the reality that the trust becomes irrevocable at the first death.

For medium exposure situations (near the exemption, in the “gray zone”), modeling matters most. Small changes—real estate appreciation, a business revaluation, life insurance ownership adjustments, or an inheritance—can push the estate into the cliff zone. Ask your attorney for scenario-based comparisons rather than relying on gut instinct.

For high exposure situations (clearly over the exemption), tax and control benefits are often significant enough to justify the structure, especially when the plan also creates guardrails for children or shields a surviving spouse from outside pressure.

Other factors to weigh include liquidity needs (will the trust have cash to pay expenses and support a spouse?), trustee fees, the practical cost of having surviving spouse’s assets tied up in trust, and the trust’s expected duration (which can stretch many years beyond the first death).

A useful break-even question: If projected administration costs are likely to approach the tax savings, or if the trust would create day-to-day cash-flow friction for the surviving spouse, explore simpler alternatives. Some families use disclaimer planning, where the surviving spouse can disclaim certain assets post-death so they pass into a bypass trust—preserving flexibility while keeping the option available. Ask your attorney for a cash-flow-focused review—not just a tax estimate.

Many New York families benefit from a targeted review built around New York’s exemption, the cliff, and funding mechanics. This often falls under estate tax planning, but it should be coordinated with the rest of your estate plan so the tax strategy and your life plan don’t pull in opposite directions.

How to Fund Your Bypass Trust Correctly

Once the plan is signed, funding and coordination make it real. Work through these steps systematically:

1. Take stock of title and ownership. Confirm how each major asset is owned (individual, joint, trust, beneficiary-designated). This is where many “we thought the will covered that” surprises surface during probate.
2. Update deeds and real estate language. Prepare and record updated deeds where appropriate. If there’s a mortgage, check with the lender before retitling, and make sure recorded language matches the trust plan.
3. Align accounts and beneficiary designations. Update bank, brokerage, and insurance accounts so titling and beneficiary designations match the plan. Identify assets that can’t be retitled the same way (retirement accounts are the most common) and handle them through coordinated beneficiary forms instead.
4. Confirm trustee logistics. Verify that the trustee and successor trustees are documented and willing to serve. Many families request a written trustee acceptance to avoid confusion later.
5. Set a timeline with accountability. Assign responsibility for each step (you, your attorney’s office, financial advisor, CPA) and set target dates so funding doesn’t stall.
6. Create a verification file. Build a last-step funding-proof file—often a checklist or summary showing what changed, when, and how. Keep it with your core estate planning documents so the surviving spouse and future trustee aren’t left guessing.

Weighing the Pros and Cons

A bypass trust decision is rarely just about taxes. It’s usually a mix of finances, family priorities, and how much administration your household is willing to take on.

For many families, less flexibility is exactly the point—it helps prevent later changes that could unintentionally cut children out. For others who prioritize maximum access and simplicity, alternatives like disclaimer planning or different trust structures may be a better fit.

Preparing Before You Meet with an Attorney

Before sitting down with an estate planning attorney, organize your key facts: estimated estate size range, asset liquidity, family structure (including any prior marriages), and whether assets are jointly owned or beneficiary-designated. This preparation helps your attorney quickly assess whether a bypass trust might make sense and spot potential concerns like unclear titling or concentrated real estate positions.

A good consultation should give you clear direction—whether that’s “yes, strong candidate,” “no, likely unnecessary,” or “needs more analysis”—along with customized next steps like a document checklist or specific questions to research executor mistakes in probate.

What to Bring to Your First Attorney Meeting

You’ll get better advice—and typically save time and fees—if you come prepared with three things.

Net worth summary: A one-page asset-and-debt list with approximate values and how each asset is owned (individual, joint, trust, retirement, business).

Key documents: Deeds, account statements, insurance policies, and current beneficiary designations. If you have existing estate planning documents (wills, trusts, powers of attorney), bring those too.

Family details: Marital history, children from any relationship, and relevant agreements (prenuptial, separation, buy-sell). A simple family relationship chart showing who’s related to whom can be surprisingly helpful.

Three Steps to Organize Your Estate Planning

1. Summarize Your Assets and Net Worth

List major asset categories, approximate values, how each is titled, and primary and contingent beneficiaries. This quickly reveals whether you’re under the exemption, near it, or missing key details that affect tax exposure.

2. Get a New York-Specific Attorney Review

Ask for a comprehensive review that specifically tests New York exemption exposure and the cliff, clarifies portability implications, and compares a bypass trust with simpler alternatives based on your goals.

3. Request a Funding Plan and Cost Estimate

Get a written funding plan and itemized fee estimate (setup, retitling support, expected ongoing administration) so you understand the real-world workload, timing, and payoff before committing.

About NY Wills & Estates

Rachel K. Ziegler, Esq. is licensed in both New York and New Jersey, with a practice focused on estate, trust, and probate planning. Credentials can be verified through the New York State Unified Court System.

NY Wills & Estates is a specialized estate planning law firm licensed in both New York and New Jersey. The firm focuses on estate planning—including wills, trusts, Medicaid planning, and estate tax strategies—so clients receive guidance tailored to their family, assets, and goals.

Consultations available at:

• Manhattan: 450 7th Avenue, Suite 2107
• Hackensack: 15 Warren Street, Suite 22

To schedule a consultation, call 516-518-8586. Typical topics include your asset snapshot, family structure, whether New York estate tax is a realistic concern, whether a bypass trust fits your goals, and what funding steps would be required.

References and Trusted Sources

• New York Department of Taxation and Finance, Estate Tax
• New York Tax Law, Article 26
• ET-706: New York Estate Tax Return Forms & Instructions
• IRS Form 706: Federal Estate Tax Return (portability election)
• New York Estates, Powers & Trusts Law (EPTL)
• IRS Publication 561 (Determining the Value of Donated Property)
• IRS Form 1041 (Trust Income Tax Return)
• New York fiduciary income tax forms

Laws, exemption amounts, and filing requirements change periodically. Always verify current rules with official sources or qualified counsel before finalizing a plan.

Ultimately: A bypass trust isn’t for everyone. But in New York, where the state exemption is lower and portability simply isn’t available, it can be the estate planning tool that makes a plan actually work as intended—especially for families near the exemption threshold or navigating blended-family dynamics. The right solution is individualized, fact-driven, and based on current tax law—not assumptions.