Bypass / Credit-Shelter / QTIP trust
Marital trust structures that shelter the first spouse's federal estate-tax exemption from being wasted. Classic "AB trust" planning. Largely obsolete for most couples since portability arrived in 2011, but still relevant for state-tax states, blended families, and control planning.
In the pre-2011 world, a married couple could lose half their combined exemption if the first spouse to die left everything to the survivor outright. "AB trust" planning split the first-to-die's estate at death: Trust A (marital / survivor) received the amount up to the exemption, Trust B (bypass / credit-shelter) received the rest, which bypassed the survivor's estate.
Since 2011, federal portability lets a surviving spouse carry over the unused exemption of the first to die (Deceased Spousal Unused Exclusion, DSUE), which eliminates most of the need for bypass trust planning at the federal level.
Bypass / credit-shelter trusts are still used for:
- State-level estate tax planning (Virginia and West Virginia have none, but many states still do).
- Second-marriage / blended-family control — (Qualified Terminable Interest Property) trusts give the surviving spouse income for life while preserving the principal for the first spouse's children.
- Protecting the first spouse's exemption if portability is repealed or becomes unavailable (e.g., remarriage).
Tagged 🔴 — the drafting is technical (terminable-interest rules, QTIP election on Form 706, state-specific language) and the consequences at death are irreversible.
State-specific notes
Virginia has no state estate tax, which removes one of the main modern reasons for AB trust planning. Still relevant for blended-family control via QTIP.
West Virginia has no state estate tax either. Same posture as Virginia.
Bypass (credit-shelter) and QTIP trusts are administered under the Alabama Uniform Trust Code (Ala. Code § 19-3B-101 et seq.). Because Alabama has no state estate tax or separate state QTIP election, planning collapses to the federal regime plus the IRC § 2010(c) portability election. The Alabama elective-share statute (Ala. Code § 43-8-70) gives the surviving spouse the lesser of one-third of the estate or the estate minus their separate estate, which can interact with bypass funding if a spouse is disinherited.