What is the term for the trust arrangement in which trust property is not included in the surviving spouse's estate for federal estate tax purposes, effectively bypassing the spouse and the tax?

• A. Bypass trust
• B. Power of appointment
• C. A/B will
• D. QTIP trust

Answer: (A)

The main idea being tested is how a trust can remove assets from the surviving spouse’s taxable estate at death. A bypass trust is designed to use the deceased spouse’s unused federal estate tax exemption by placing assets into a trust at the first death. Those assets are protected from being included in the surviving spouse’s gross estate for federal estate tax purposes, so they don’t count toward the surviving spouse’s estate tax liability. The surviving spouse may receive income or even some principal during life, but the trust principal itself stays outside the surviving spouse’s estate for tax purposes. This arrangement effectively “bypasses” the spouse and the tax, allowing both spouses’ exemptions to shelter more assets from estate tax.

Other options don’t achieve this same tax-sheltering effect. For instance, a QTIP trust is built to secure the marital deduction and keep control over future distributions, but it does not exclude assets from the surviving spouse’s estate at the second death. A power of appointment is a tool for designating who receives property, not specifically about removing property from the surviving spouse’s estate for tax purposes. An A/B will structure relates to how assets are distributed after death but isn’t the mechanism that bypasses the estate tax through the exemption.