For married couples, effectively managing estate taxes often hinges on strategic planning, and a bypass trust, also known as an AB trust or credit shelter trust, is a frequently employed tool to minimize potential tax liabilities. As of 2024, the federal estate tax exemption is $13.61 million per individual; meaning estates below this value are not subject to federal estate tax. However, this exemption is temporary and scheduled to revert to approximately $6.2 million in 2026, potentially bringing many more estates into taxable territory. A bypass trust operates by dividing a married couple’s assets into two trusts: Trust A (the bypass trust) and Trust B (the marital trust). The purpose is to utilize each spouse’s lifetime estate tax exemption, sheltering assets from estate taxes when the first spouse passes away.
How Does a Bypass Trust Actually Work?
When the first spouse dies, assets up to the estate tax exemption amount are transferred into the bypass trust. This portion of the estate is then protected from estate taxes, both for the deceased spouse’s estate and, crucially, for the surviving spouse’s future estate. The remainder of the assets goes into the marital trust, which allows the surviving spouse to continue using the deceased spouse’s unused exemption, a feature known as portability, but this has limitations. The surviving spouse receives income from both trusts during their lifetime. Upon the death of the surviving spouse, any remaining assets in the bypass trust pass directly to the beneficiaries, avoiding estate taxes altogether. As of 2023, only about 0.05% of estates file an estate tax return, but proactive planning is essential for those approaching the exemption threshold.
What Happens if I Don’t Create a Bypass Trust?
Without a bypass trust, the entire estate would be subject to estate taxes when the first spouse dies if it exceeds the exemption limit. This can significantly reduce the assets available to beneficiaries. Let me tell you about the Millers. They were a lovely couple, successful in their careers, and amassed a considerable estate. They assumed that, because their estate was under the then-current exemption limit, they didn’t need a trust. Unfortunately, the laws changed, and by the time the first spouse passed away, their estate exceeded the new, lower exemption. A substantial portion of their assets went to estate taxes, leaving their children with significantly less than they had hoped for. Had they established a bypass trust, they could have shielded a significant portion of their estate from taxation.
Are Bypass Trusts Still Relevant with Portability?
Estate tax portability allows surviving spouses to use any unused portion of their deceased spouse’s estate tax exemption. While portability simplifies estate planning, it isn’t a perfect substitute for a bypass trust. Portability requires filing an estate tax return even if no taxes are due, which can be cumbersome. Additionally, portability doesn’t offer asset protection benefits like a bypass trust. I once worked with a client, old Mr. Henderson, who valued privacy above all else. He was concerned about creditors potentially accessing his estate after his death. A bypass trust, structured correctly, provided an extra layer of asset protection that portability simply couldn’t offer. Furthermore, if the surviving spouse remarries, portability is lost, and the assets become subject to estate taxes in the new spouse’s estate.
How Can I Ensure a Bypass Trust Works for My Family?
Establishing a bypass trust requires careful planning and the guidance of an experienced estate planning attorney. The trust document must be drafted precisely to meet your specific goals and comply with current tax laws. It’s crucial to regularly review and update the trust as your assets, family situation, or tax laws change. “Proper estate planning isn’t just about avoiding taxes; it’s about ensuring your wishes are carried out and your family is taken care of,” as I often tell my clients. The process involves identifying assets, determining the appropriate funding strategy, and considering potential future scenarios. When done correctly, a bypass trust can be a powerful tool for minimizing estate taxes, protecting assets, and securing your family’s financial future.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, an estate planning lawyer near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
| wills | estate planning | living trusts |
| estate planning attorney | estate planning attorney | estate planning attorney near me |
| estate planning lawyer | estate planning lawyer | living trust lawyer |
About Point Loma Estate Planning:
Secure Your Legacy, Safeguard Your Loved Ones. Point Loma Estate Planning Law, APC.
Feeling overwhelmed by estate planning? You’re not alone. With 27 years of proven experience – crafting over 25,000 personalized plans and trusts – we transform complexity into clarity.
Our Areas of Focus:
Legacy Protection: (minimizing taxes, maximizing asset preservation).
Crafting Living Trusts: (administration and litigation).
Elder Care & Tax Strategy: Avoid family discord and costly errors.
Discover peace of mind with our compassionate guidance.
Claim your exclusive 30-minute consultation today!
If you have any questions about: What is the difference between an MPOA and a living will?
OR
How can I protect myself from financial abuse with a Financial Power of Attorney?
and or:
Why is choosing the right executor or trustee so important?
Oh and please consider:
Can you describe a real-world example of a poor executor choice impacting an estate?
Please Call or visit the address above. Thank you.