Trying to predict the federal estate tax is about as easy as trying to predict the stock market. After a decade of almost yearly changes, the government has currently legislated a temporary fix that expires 2012. Given the uncertain nature of the tax, couples need to remain vigilant about estate planning. Bypass trusts can help a couple maximize use of the federal estate tax exemption and ultimately bequeath more of their wealth to successive generations.
For bypass trusts to achieve their goal, a couple needs to value their assets, title them appropriately, and review their estate plan every few years to determine whether the trust’s funding mechanisms remain appropriate. Trusts are complicated legal entities, and it is important to seek advice from an estate planning attorney with experience in this area.
Why Consider Bypass Trusts?
A married taxpayer may bequeath an unlimited amount of assets to a spouse without triggering federal estate taxes, a practice known as the unlimited marital deduction. A missed opportunity can arise when a surviving spouse inherits these assets and subsequently dies with an estate that is worth more than the amount of the federal estate tax exemption in effect at the time. In this scenario, the estate tax exemption of the spouse that died first was not used and, in effect, was wasted. Bypass trusts address this situation by maximizing the exemptions of both spouses.
How Bypass Trusts Work
Couples often establish bypass trusts within the framework of a living trust that determines legal ownership of the couple’s assets. Estate planning experts typically recommend that each spouse maintains a bypass trust with assets that are worth close to the value of the current estate tax exemption. Assets within the bypass trusts typically are those that the couple does not intend to use during their lifetimes but instead plans to bequeath to heirs.
Upon the death of the spouse that dies first, the surviving spouse inherits the decedent’s assets that are not part of the decedent’s bypass trust. Because of the unlimited marital deduction, there is no immediate tax liability for these assets. The surviving spouse is the beneficiary of the decedent’s bypass trust, which will not be included in the surviving spouse’s estate. The assets used to fund the decedent’s bypass trust thus bypass the estate tax that otherwise would have been assessed upon the death of the surviving spouse. When the surviving spouse dies, the couple’s heirs become beneficiaries of both bypass trusts.
If you believe that a bypass trust may be suitable for your situation, an estate planning attorney can help you learn more about the details.
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