Of the common types of trusts, a popular form is called the bypass trust, also known as a credit shelter trust. It is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax (in 2008, every individual is entitled to an estate tax credit, which essentially exempts the first $2 million in assets from tax; $3.5 million in 2009).

Of course, a married person may leave an unlimited amount of assets to his or her spouse, free of estate taxes and without using up any of the estate tax credit. The problem is that if the second spouse then dies with an estate worth more than the exempted amount, his or her estate would be subject to estate tax. Meanwhile, the first spouse's estate tax credit was unused and, in effect, wasted.

The bypass trust was created to take care of this problem. This type of trust may be revocable or irrevocable, and living or testamentary. Typically, the trust instrument initially creates a single living trust that is revocable.

Upon the death of the first spouse, the instrument establishes a separate, irrevocable "bypass" trust with the deceased spouse's share of the trust's assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest.

The irrevocable trust is funded to the extent of the first spouse's exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse's estate tax credit.

At the same time, special language is used in the irrevocable trust so that the assets in the irrevocable trust will not be included in the taxable estate of the beneficiary (i.e., the other spouse). Generally this involves giving the second spouse only limited powers to control the trust assets. Thus, the bypass trust is aptly named, as the assets in the irrevocable trust "bypass" the estate tax that would be assessed when the second spouse dies.