About Bypass Trusts
A bypass trust is method used by taxpayers to avoid federal estate taxes and many of those imposed by the states. It can be a very useful device for one spouse to leave an estate to the other, thus guaranteeing that the estate will be taxed only once by the demise of the second spouse. Currently, you need not be concerned about federal estate taxes if your estate has a value of less than $2 million.
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Significance
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All estates valued more than $2 million must pay federal estate tax on it holdings. The rates start at 18 percent of the first $10,000 exceeding $2 million and and reach a 45 percent in the upper limits. Therefore, a bypass trust enables heirs ultimately to inherit more from their families.
Features
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If a bypass trust is written to save taxes, it must following the rules set out by the IRS. Essentially, half of a person's estate can be given to a spouse tax-free as a marital deduction. The surviving spouse is given what is known as a life estate in the remainder, meaning that person can have use of all of the income from the trust, and can even withdraw up to 5 percent of the principal each year. In addition, the trustee that is appointed to oversee the trust can be given certain latitude to use more principal in the even of health or other serious need. Further, to meet the regulations, the surviving spouse must be limited in the ability to distribute the assets of the trust upon death.
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Warning
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Unless the IRS rules are following precisely in the creation of a bypass trust, the assets may not be shielded from federal estate tax upon the death of the surviving spouse. There are specific terms that must appear in the trust, and it takes very little to cost an estate hundreds of thousands of dollar in unintended tax. Make certain that the attorney drafting the document is tax-savvy, and be prepared to pay substantially for his knowledge.
Benefits
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Great creativity can be displayed in designing an estate plan around a bypass trust. For instance, the trust can continue after the death of the surviving spouse for the benefit the family. In fact, if it follows certain IRS guidelines, it can even remain for the benefit of others without having to pay tax.
Potential
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Many Americans do not have to worry about setting up a bypass trust to avoid taxes because their estates do not exceed $2 million. However, if the U.S. Congress does not repeal this law and people without estate plans will again become subject to estate tax, you can look for a rapid increase in the estate planning field to deal with the burden this will place on many more Americans.
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