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Bypass Trusts


Though they are used less today than they were a few years ago, bypass trusts are still an important estate planning tool. You should know the basics about bypass trusts and the changes in the law that make bypass trusts less common, but still a useful tool for some people.

What Are Bypass Trusts?

The purpose of a bypass trust is to save money on estate taxes. Each person gets a certain amount of money that is exempt from estate tax; in 2016 it is $5.45 million. The purpose of the bypass trust is to eliminate one particular situation.

The situation that it was created to avoid is this one: say that there is a married couple who plan to both leave their money to each other in their wills and then the rest to their kids. If the husband dies first, then his money would all go to his wife (tax free because she is his surviving spouse). However, when she dies she only has the $5.45 million exemption and so any amount over that which passes to her children is subject to the estate tax.

A bypass trust was created to make sure that no one’s personal estate tax exemption is “wasted”. Bypass trusts will take the assets from the spouse that dies first and put it in a trust that allows the surviving spouse to access that money if they need to, but then the money will go to the ultimate beneficiaries without ever being part of the surviving spouse’s estate and therefore remaining untaxed up to the first spouse’s exemption amount. With a correctly created bypass trust both spouse’s estate tax exemptions are fully utilized.

Changes to Estate Tax Laws

However, a 2013 change to the estate tax law has made bypass trusts less popular. This change allows surviving spouses to use any unused portion of the estate tax exemption from the deceased spouse. This is called “portability”. Using the initial example, assuming the husband who died first did not use any of his estate tax exemption during his life and gave all of his assets to his wife at death, at her death she could take advantage of both his and her exemptions. In 2016 this would be $10.9 million, and the end result would be similar as with the bypass trust.

Current Benefits of Bypass Trusts

There still are some benefits to a bypass trust though. One of the most important benefits for large estates is that the growth in the assets between the death of the first spouse and the death of the second spouse is not included. In other words, because bypass trusts use the exemption at the time of death, the growth on those assets is not taxed. However, with portability the assets grow until the death of the second partner and that growth is not exempt. Also, if the surviving spouse remarries the portability from their previous spouse disappears, among other benefits. 

Let Us Help You Today

As with bypass trusts, the laws around estate tax and other things related to estate planning are constantly changing, so if you are starting to think about planning your estate you should talk to a knowledgeable estate planning attorney to get the most up to date information. Our experienced estate planning attorneys at Millhorn Elder Law Planning Group in The Villages, Florida, can help you to plan your estate in a way that minimizes taxes and fees and maximizes the assets that your beneficiaries get.

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