The 2010 Estate Tax Relief Act Doesn't Negate the Importance of the Bypass Trust
One purpose of the bypass trust is to use the first-to-die spouse's personal estate tax exemption to save part of his estate from paying NVD-001estate taxes since his tax exemption would be lost if all his holding were passed to the surviving spouse. At her (the second spouse to die) death, only her personal estate tax exemption would be available to shelter some of her estate for the benefit of heirs.
But now, the 2010 Tax Relief allows her to use her deceased husband's personal estate tax exemption at her death too. This option, though doesn't wipe out the importance of setting up a bypass trust. Here's why....
If you have an estate worth more than a few million, then you could be subject to 35% estate taxes on the amount over the estate tax exemption. The exemption was set to revert to only $1 million - which isn't much these days - but the new tax relief act increased it to $5 million. More than that, it allows the second-spouse-to die to use not only her own $5 million exemption, but also whatever her late husband didn't use of his exemption.
So if you have less than about $10 million in estate holdings should you forget about a bypass trust? No - because the new law is good for only 2011 and 2012 and the bypass trust has other benefits.
The additional tax benefit of the bypass trust is that holdings that it shelters will continue to grow while the second-to-die remains alive. Those holdings are permanently outside the estate taxation at the time of her death. That's an important tax-sheltering purpose.
The enduring benefit of a bypass trust is to ensure that the first-to-die spouse's property will be disposed of according to his wishes, even if the surviving spouse remarries or chooses to adopt a different estate plan for the surviving spouse's assets. Holding his assets in a trust protects them from any changes that his surviving spouse may make to them.
As an example, a bypass trust would assure the deceased husband that his children from a previous marriage willUM0-100 indeed receive what he has put aside from him.
*How does the bypass trust work?
Generally, an A/B living trust is created while both spouses are alive. They contribute to it over time. When the first spouse dies, a stated portion of it goes into the B trust (i.e. the bypass trust). The rest goes into the A trust the surviving spouse will use for her wishes until she dies. The bypass trust receives the other portion of the A/B trust's property in a way that minimizes estate taxation and fulfills other purposes for which it is created. Its property is necessarily prevented from being accessible to the surviving spouse during her life.
The bypass trust also takes advantage of a stepped-UM0-200up basis where the value of the property transferred to the successors of the trust is said to be the fair market value at the time of the transfer at death. This generally lowers any capital gains taxes the children must pay when they eventually sell their inherited property.
But now, the 2010 Tax Relief allows her to use her deceased husband's personal estate tax exemption at her death too. This option, though doesn't wipe out the importance of setting up a bypass trust. Here's why....
If you have an estate worth more than a few million, then you could be subject to 35% estate taxes on the amount over the estate tax exemption. The exemption was set to revert to only $1 million - which isn't much these days - but the new tax relief act increased it to $5 million. More than that, it allows the second-spouse-to die to use not only her own $5 million exemption, but also whatever her late husband didn't use of his exemption.
So if you have less than about $10 million in estate holdings should you forget about a bypass trust? No - because the new law is good for only 2011 and 2012 and the bypass trust has other benefits.
The additional tax benefit of the bypass trust is that holdings that it shelters will continue to grow while the second-to-die remains alive. Those holdings are permanently outside the estate taxation at the time of her death. That's an important tax-sheltering purpose.
The enduring benefit of a bypass trust is to ensure that the first-to-die spouse's property will be disposed of according to his wishes, even if the surviving spouse remarries or chooses to adopt a different estate plan for the surviving spouse's assets. Holding his assets in a trust protects them from any changes that his surviving spouse may make to them.
As an example, a bypass trust would assure the deceased husband that his children from a previous marriage willUM0-100 indeed receive what he has put aside from him.
*How does the bypass trust work?
Generally, an A/B living trust is created while both spouses are alive. They contribute to it over time. When the first spouse dies, a stated portion of it goes into the B trust (i.e. the bypass trust). The rest goes into the A trust the surviving spouse will use for her wishes until she dies. The bypass trust receives the other portion of the A/B trust's property in a way that minimizes estate taxation and fulfills other purposes for which it is created. Its property is necessarily prevented from being accessible to the surviving spouse during her life.
The bypass trust also takes advantage of a stepped-UM0-200up basis where the value of the property transferred to the successors of the trust is said to be the fair market value at the time of the transfer at death. This generally lowers any capital gains taxes the children must pay when they eventually sell their inherited property.
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