Can a bypass trust continue to generate income after the spouse's death? The question of whether a bypass trust – also known as a credit shelter trust or an A-B trust – continues to generate income after the first spouse’s death is a common one for estate planning clients in San Diego. The short answer is yes, a properly structured bypass trust is *designed* to continue generating income, and that income stream is a key component of its long-term benefits. The primary purpose of a bypass trust is to utilize the deceased spouse’s federal estate tax exemption, sheltering assets from estate taxes and allowing them to grow for the benefit of the surviving spouse and, eventually, the beneficiaries. This is achieved by funding the trust with assets up to the exemption amount, preventing those assets from being included in the surviving spouse's taxable estate. Approximately 40% of estates in the US would benefit from a bypass trust, as they exceed the federal estate tax exemption threshold. The trust continues as a separate legal entity, and the income generated from the assets within it is typically distributed to the surviving spouse during their lifetime, often in the form of income and principal distributions for their health, education, maintenance, and support (HEMS).
What happens to the income generated within a bypass trust? The income generated by assets held within a bypass trust – dividends, interest, rental income, capital gains – isn't simply lost upon the first spouse’s death. It continues to accumulate within the trust, and the trustee – who could be the surviving spouse, a family member, or a professional trustee like Ted Cook at a San Diego trust firm – is responsible for managing and distributing that income according to the trust’s terms. Typically, the surviving spouse is the primary beneficiary and receives