From WealthCounsel VP Matt McClintock:
Increasing asset protection for the surviving spouse and others. Depending on the trust design, a bypass-type trust can provide greater asset protection than a QTIP marital trust. A bypass trust can have multiple discretionary beneficiaries, while a marital deduction trust can have only one–the surviving spouse. The bypass trust can be entirely discretionary, while a marital trust must distribute all of its income to the surviving spouse at least annually. A marital trust must also either give the surviving spouse a general power of appointment or allow the spouse to compel the trustee to convert non-income-producing property to income-producing property. None of those are required in a bypass trust.
Other beneficiaries in a bypass trust enjoy asset protection as well. If the beneficiaries are discretionary, not entitled to mandatory distributions or distributions defined by an ascertainable standard, the trustee may choose to make or withhold distributions for beneficiaries depending on their creditor risk profile at any given time. By diffusing the discretionary beneficial interests among multiple beneficiaries, the trust can minimize the likelihood that a creditor can attach a beneficiary’s interest in the trust.
Preserving an inheritance for settlor’s beneficiaries. Depending on the trust design, a bypass trust can provide much greater assurance that the settlor’s originally-intended beneficiaries ultimately receive the property from the trust after the surviving spouse beneficiary’s death. With a marital trust, there is a greater possibility that the surviving spouse consumes the trust’s assets during life, or diverts the assets away by exercising a power of appointment. If the original settlor and the surviving spouse have children from prior relationships, or if the surviving spouse remarries after the original settlor’s death, placing assets into a bypass-type trust reduces the possibility that the original settlor’s children are disinherited in the future.
Source: Why “bypass” trusts still matter | Matthew McClintock | Pulse | LinkedIn
