The Advantages of a Bypass Trust
An individual creates a bypass trust to protect assets from federal gift and estate taxes upon death and to ensure that the estate is distributed as she intends. The bypass trust splits into two trusts following the death of the trust creator. One trust holds the deceased spouse's assets up to the amount allowed. The second trust holds the remainder of the deceased spouse's assets. The assets in both trusts are not subject to federal taxes. Federal estate tax laws signed in 2011 make bypass trusts unnecessary for some couples. The new law allows spouses to protect their estates from federal taxes without using a bypass trust. However, the bypass trust has advantages for some couples and families.
Other People Are Reading
-
Bypass Trusts
-
The creator of the trust is called the grantor. The bypass trust, which is also called an AB Trust and a Credit Shelter Trust, is an irrevocable trust that cannot be changed or revoked. The grantor leaves her estate to the trust instead of the surviving spouse. Spouses may both leave their assets to the trust instead of to each other. Bypass refers to the fact that the estate bypasses the surviving spouse and enters into the trust. The surviving spouse may use the income from the trust during his lifetime, but cannot touch the principal. The surviving spouse never owns the estate and never owes federal taxes on the assets. The estate passes to the grantor's children, or another designated heir, upon the death of the surviving spouse.
Protecting Assets for Heirs
-
The bypass trust has advantages for a person who wants to ensure that his children inherit his estate. A person in a second marriage may choose to create a bypass trust that uses his assets to take care of a surviving spouse, but preserves those assets for his children. For instance, a woman remarries and creates a will that moves her family farm to a bypass trust after her death and until the death of her husband, after which the farm goes to her daughter who does not have to pay estate taxes.
-
Unmarried Couples
-
The 2011 federal estate tax law adds a portability provision, which allows the surviving spouse to add to his own exemption the unused portion of the deceased spouse's exemption. Portability allows for the transfer of up to $10 million without owing federal taxes. Portability applies only to married couple whose marriage is recognized by the federal government. This excludes same-sex couples, including those married under state laws, and couples who are not legally married. Couples that cannot take advantage of the portability provision may find advantages in a bypass trust, which unmarried couples may use to avoid estate taxes.
Expiration of 2011 Tax Law
-
Couples might want to take advantage of the bypass trust in case the new 2011 estate law is allowed to expire at the end of 2012, as planned. The new law increases the individual lifetime exemption from federal gift and estate taxes to $5 million in 2011 and 2012 for transfers to heirs who are not spouses. If the new law is allowed to expire, portability ends, the exemption amount decreases to $1 million and the estate tax rate increases by 20 percent..
Disclaimers
-
Disclaimers allow surviving spouses to decide whether to transfer the deceased spouse's estate into a bypass trust. A person leaves his entire estate to his spouse and gives her the right to refuse, or disclaim, all or part of the estate and direct that the disclaimed portion is transferred into a bypass trust. Disclaimers allow the surviving spouse to make a decision based on her financial needs, current laws and tax rates. Disclaimers can help with state estate taxes, none of which allow portable exemptions. A surviving spouse might decide to create a bypass trust and transfer assets up to the highest amount allowed by her state of residence.
-
References
- Photo Credit Jupiterimages/liquidlibrary/Getty Images
