What Are Capital Gains in a Bypass Trust?

Video Transcript

"So what are the capital gains in a bypass trust? Well, what happens at death--the death of the first spouse--is that it should, the survivor should get what's called a step up in the basis of all the assets. At least of all the deceased's assets. So the survivor should start out with the money they inherited from their spouse with a brand new basis. Now what that means is that they can sell the stock, the real estate, other assets, the day after the funeral or shortly thereafter, and they won't pay any capital gains taxes. The deceased's share, if there's a bypass trust in place, won't go directly to the surviving spouse, it'll go into a trust for the surviving spouse. And we call that trust a bypass trust. Sometimes those trusts are called credit shelter trusts. The money goes into the bypass trust--the survivor can be the trustee, the survivor may not be the trustee. But the money that's in the bypass trust is available for the survivor, and in certain situations the survivor and maybe the kids, for their use and enjoyment during the remaining lifetime of the surviving spouse. If the surviving spouse sells stock that he or she acquired from the deceased spouse at the first death--sells it later. So the stock they got from the deceased spouse on the date of death was worth a hundred dollars, now the stock is worth a hundred fifty dollars. The surviving spouse will pay a capital gains tax, or the credit shelter or bypass trust will pay a capital gains tax of whatever the capital gains tax rate is, on that fifty dollar profit. On the second death--so when the surviving spouse dies, the assets that are in the bypass trust don't get a new basis. They stay at the same level, the same basis that they were when the first spouse died. So there's not a--sometimes the term is a second step up. There's no second step up of assets that are in a bypass trust. The basis of the stock, the basis of the real estate that's in the bypass trust stays the same. It's set on the date of the first death. It remains that way all the way through until those assets are eventually sold."