The estate tax, while impacting a relatively small percentage of estates, remains a concern for high-net-worth individuals and families. As of 2023, the federal estate tax exemption is $12.92 million per individual, meaning estates below that threshold are not subject to federal estate tax. However, this number is subject to change with legislation, and state estate taxes can have much lower thresholds. A bypass trust, also known as an AB trust or credit shelter trust, is a powerful estate planning tool designed to take advantage of the estate tax exemption and potentially minimize estate taxes for surviving spouses. It’s a carefully constructed arrangement that allows assets to “bypass” the surviving spouse’s estate, preventing those assets from being included in their taxable estate when they eventually pass away. This strategy becomes particularly valuable when estate values are near or exceed the exemption amount.
What happens if my estate exceeds the estate tax exemption?
If an estate exceeds the federal estate tax exemption, the excess value is subject to estate tax, currently at a rate of up to 40%. For example, an estate valued at $14 million, with a $12.92 million exemption, would have $1.08 million subject to tax, resulting in a potential tax liability of up to $432,000. This is where a bypass trust steps in – it functions by dividing assets into two trusts upon the death of the first spouse. One trust, the ‘A’ trust, is designed to hold assets up to the estate tax exemption amount, shielding those assets from estate tax. The second trust, the ‘B’ trust, holds any remaining assets. Critically, assets placed in the ‘B’ trust are *not* included in the surviving spouse’s taxable estate, thus preserving a significant portion of the overall estate from taxation. It’s important to note the portability rules allow married couples to combine their estate tax exemptions, which simplifies planning in many cases but doesn’t eliminate the need for careful consideration of a bypass trust.
Is a bypass trust right for my situation?
Whether a bypass trust is appropriate depends heavily on individual circumstances, including estate size, state estate tax laws, and family dynamics. For couples with estates significantly below the exemption amount, the complexity of a bypass trust may not outweigh the benefits. However, for those with larger estates, or those concerned about potential changes to the estate tax laws, a bypass trust can provide a crucial layer of protection. It’s important to remember that establishing a bypass trust is not a one-size-fits-all solution, and it requires careful planning and consideration of various factors. “Around 5.2 million US estates are projected to be subject to estate tax in the future,” demonstrating a consistent need for estate planning tools. The trust must be properly funded and administered to achieve its intended purpose, and ongoing maintenance is essential to ensure it remains effective.
I heard bypass trusts are outdated, is that true?
Historically, bypass trusts were a staple of estate planning. However, with the advent of estate tax portability—allowing surviving spouses to use the unused portion of their deceased spouse’s exemption—their popularity has waned. Portability simplifies estate planning by essentially doubling the exemption for married couples, often eliminating the immediate need for a complex bypass trust. But it is a mistake to assume that bypass trusts are obsolete. Portability isn’t foolproof. If a surviving spouse remarries, they could lose access to the unused exemption, and it requires careful planning to ensure the exemption is properly transferred. There was a situation with the Millers where the husband, David, passed away without fully utilizing his estate tax exemption, and his wife, Sarah, remarried a few years later. Because they hadn’t properly planned for portability, a significant portion of David’s unused exemption was lost, resulting in unexpected estate taxes. This is where a bypass trust could have provided protection.
How can I ensure my bypass trust is properly structured and funded?
Proper structuring and funding are absolutely crucial for a bypass trust to be effective. A qualified estate planning attorney, like those at Steve Bliss Law, can help you navigate the complexities of trust law and ensure your trust is tailored to your specific needs and goals. It’s not simply about creating the document; it’s about properly titling assets into the trust, maintaining accurate records, and periodically reviewing the trust to ensure it continues to align with your wishes and the current legal landscape. I once worked with a client, Mr. Henderson, who created a bypass trust but failed to properly fund it. Years later, after his passing, the trust was essentially empty, defeating its entire purpose. After a careful review and re-titling of assets, his wife was able to benefit from the tax advantages as originally intended. A well-crafted and properly funded bypass trust, coupled with a comprehensive estate plan, provides peace of mind and ensures your assets are protected and distributed according to your wishes, minimizing tax burdens for your loved ones.
<\strong>
About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
- living trust
- revocable living trust
- irrevocable trust
- family trust
- wills & trusts
- wills
- estate planning
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/RL4LUmGoyQQDpNUy9
Address:
The Law Firm of Steven F. Bliss Esq.43920 Margarita Rd ste f, Temecula, CA 92592
(951) 223-7000
Feel free to ask Attorney Steve Bliss about: “How can I plan for long-term care or disability?”
Or “What’s the difference between probate and non-probate assets?”
or “How do I fund my trust with real estate or property?
or even: “What property is considered exempt in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.