A bypass trust allows the business owner to keep life insurance proceeds out of his/her estate as long as the owner doesn't die within three years of establishing the trust.

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A bypass trust is designed to reduce the estate tax liability by allowing each spouse to use their estate tax exemption, not specifically to keep life insurance proceeds out of the estate. The three-year rule applies to life insurance policies transferred into an irrevocable life insurance trust (ILIT), not a bypass trust.

A Bypass Trust Allows the Business Owner to Keep Life