What is Bypass Trust?

Legal Definition
In the United States, a bypass trust is an irrevocable trust into which the settlor deposits assets and which is designed to pay trust income and principal to the settlor's spouse for the duration of the spouse's life. The transfer of the settlor's assets to the bypass trust for the benefit of the spouse is a tax-free transfer under the currently unlimited Marital Deduction. At the settlor's death, the assets in the bypass trust are not included in the settlor's estate, effectively reducing the total value of the estate and therefore potentially limiting the estate taxes owed at the settlor's death.

Bypass trusts are used in the United States as a legitimate tool to circumvent gift tax, and to minimize taxation of assets upon death of a married couple. The term may have different meanings in other jurisdictions.
-- Wikipedia
Legal Definition
A bypass trust is a tax--minimizing estate planning arrangement for spouses. During life, the couple transfers ownership of property into two trusts. At the death of the first spouse, some of the property goes to one trust (Trust A) for the maintenance of the surviving spouse. The surviving spouse will use this money to live off of. The remainder of the property goes into the second trust (Trust B). The surviving spouse will have limited access to the property in Trust B, but this property will be passed on to the beneficiaries (most often, the couples children or heirs) with minimized tax consequences (the taxes will be less then if the property was passed through the estate, or given as a gift during the lifetime of the couple.

See AB Trust.
Legal Definition
Trusts are used in the United States as a legitimate tool to circumvent gift tax, and to minimize taxation of assets upon death of a married couple.