Did Portability Make Bypass Trusts Unnecessary?

October 15, 2026 by JP Rankin

Last Updated on October 15, 2026

The short answer

Two answers, because people arrive at this article with two different questions.

If you are asking whether a bypass trust cuts your surviving spouse off from the money: no. They can receive income and, usually, principal for health, education, maintenance, and support. Often they can serve as trustee (with some important limitations). They simply do not own the assets personally.

If you are asking whether portability made bypass trusts unnecessary: it made them unnecessary for a lot of families, which is not the same thing. Portability only works if somebody files a federal estate tax return within nine months of the first death. Many families never file it, because nobody told them they had to.

What is a bypass trust, and does my spouse lose access to the money?

One of the most common things I have to clear up in a first meeting is what a bypass trust actually does to a surviving spouse’s access to money.

The name does not help. “Bypass” sounds like the assets are being diverted away from the spouse. That is not what happens.

Here is the idea behind it. When one spouse dies, a portion of the estate, generally up to the deceased spouse’s full exemption amount, which is $15,000,000 in 2026, goes into a trust rather than passing outright to the surviving spouse (IRS, What’s new, Estate and gift tax). The surviving spouse can still benefit from that trust. They may receive income and, depending on how it is drafted, principal distributions for their health, education, maintenance, and support. In many cases, they can even serve as trustee. The assets are not gone. They are not locked away. The spouse simply does not own them personally.

The reason that matters: when the surviving spouse later dies, the trust assets are not counted in their taxable estate. More importantly, all the growth that happened inside that trust stays outside the estate as well. If the trust was funded with $15,000,000 and grew to $30,000,000 over twenty years, the family captures that appreciation without additional estate tax. That is the point.

What is portability, and how does it work?

Portability lets the surviving spouse inherit the deceased spouse’s unused estate tax exemption. The tax code calls it the deceased spousal unused exclusion amount, or DSUE. Because of portability, some people argue the bypass trust is unnecessary. You can let everything pass to the surviving spouse and elect portability instead.

That argument is not wrong for some families. But there is a step in it that gets skipped constantly.

To claim portability, the executor has to file Form 706, the federal estate tax return, and make the election. That filing obligation applies regardless of the size of the estate, including estates far too small to owe a dollar of tax. The return is due nine months after the date of death, with an automatic six month extension available on Form 4768 (IRS, Instructions for Form 706).

The benefit is not automatic. It is an election on a return most families do not know exists.

What if we missed the deadline to elect portability?

You may still be fine, and this is the part I want people to find.

If the estate was not otherwise required to file a return, the IRS built a rescue hatch. Under Revenue Procedure 2022-32, the executor can file Form 706 to elect portability any time on or before the fifth anniversary of the date of death, as long as the return states at the top that it is filed pursuant to that revenue procedure (IRS, Rev. Proc. 2022-32).

If your spouse died in the last five years and nobody filed anything, make the call this month rather than next year. That window closes on a hard date.

Bypass trust vs portability: what is the difference?

Both approaches do the same basic job. They make sure the first spouse’s exemption does not go to waste. They just get there differently, and the differences are where the decision gets made.

With a bypass trust, the assets go into a trust at the first death. Someone has to set that trust up, fund it, and keep it administered for the rest of the surviving spouse’s life. In exchange, everything that trust earns and grows stays outside the survivor’s estate, and the spouse who died decides where the money ends up after the survivor is gone.

With portability, everything can pass straight to the surviving spouse, and the unused exemption follows along as a tax election. The paperwork is one federal return, filed within nine months of the first death. It is simpler and less expensive. But the growth stays inside the survivor’s estate, and the survivor decides where everything goes.

There is one more difference, and it is the one nobody mentions. Property inherited from someone who died generally takes a new income tax basis equal to its value on the date of death (26 U.S.C. § 1014). Assets sitting in a bypass trust are not part of the survivor’s estate, so they do not get a second step-up when the survivor dies. Assets covered by portability are, so they do.

In plain terms: if you and your spouse will never come close to $30,000,000, the bypass trust saves you nothing in estate tax, and the second step-up from portability can save your children real money in capital gains when they sell the house on Sullivan’s Island or the stock portfolio you built over forty years.

That is why portability genuinely is the better answer for a lot of people, and I say so to clients regularly.

Five reasons a bypass trust may still matter

It captures appreciation. The DSUE is a fixed dollar figure set at the first death. A bypass trust keeps growing, and all of that growth stays outside the estate.
It handles generation-skipping tax planning. The GST exemption, which applies when wealth skips to grandchildren, is not portable between spouses. It is allocated by the individual or the individual’s executor, with no provision transferring it to a surviving spouse (26 U.S.C. § 2631). Each spouse has to use their own. A bypass trust can shelter assets from GST tax in a way a portability election cannot replicate.
It provides creditor protection. Assets in a trust are generally not reachable by the surviving spouse’s future creditors. Assets owned outright are. That is a practice judgment, and the strength of it depends on drafting.
It provides remarriage protection, and the tax code backs this one up. If the surviving spouse remarries, assets passing outright can end up with a new spouse and potentially that spouse’s family. There is also a tax version of the same problem: the DSUE is limited to the exclusion of the last deceased spouse (26 U.S.C. § 2010(c)(4)). If your spouse remarries and the new spouse dies first, the exemption you left behind can be replaced by whatever that person left, which may be nothing. A trust does not care who your spouse marries.
It gives the first spouse control over who ultimately inherits. This is judgment rather than statute, and it is the reason I draft the most bypass trusts. In blended families the concern is that assets pass to a new spouse and then away from the children of the first marriage. Most of the time leaving everything outright works out fine. When there are children from a prior marriage, “most of the time” is not a standard anyone should accept.

If none of those five describe you, portability is probably your answer and you should feel good about it.

Does South Carolina have an estate tax that changes this?

No. South Carolina’s estate tax is measured by the federal credit for state death taxes (S.C. Code § 12-16-510), and Congress repealed the section that created that credit (26 U.S.C. § 2011). There is no separate South Carolina estate tax to plan around.

This matters if you moved here from the Northeast. In a state with its own estate tax and a low threshold, bypass trusts stay common for state tax reasons alone. In South Carolina they do not. A trust you brought from New York or New Jersey may be built for a tax you no longer owe.

How do I know which one my plan uses?

Pull out your documents and look for these words.

“Family trust,” “credit shelter trust,” “Trust B,” or a formula referring to the “applicable exclusion amount” means you have a bypass trust, and it was probably drafted before portability became permanent in 2013.
“Disclaimer” near a gift to your spouse means your surviving spouse gets to decide after the first death.
Everything to my spouse, outright, with no trust language means you are relying on portability, whether anyone explained that to you or not.

I see a lot of estate plans in my practice that were set up years ago and now have outdated bypass trust provisions, documents drafted when exemptions were far lower, when portability did not exist, and when the planning assumptions were completely different. Those documents sometimes fund the bypass trust in a way that creates more problems than it solves today. If your estate plan is more than five years old and you own meaningful assets, it is worth a review.