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Bypass Trust Estate Planning
A bypass trust allows for a spouse’s wealthy to go into a trust after their death. While the bypass trust is meant to support the surviving spouse until they die, the surviving spouse’s rights to that wealth depend on the terms of the trust. The surviving spouse does not own the assets in the trust but can receive income from it throughout their lifetime.
Other people that may benefit from the bypass trust are the descendants of the deceased spouse. Some of the other names for a bypass trust include:
- Credit shelter trust
- Family trust
- Spousal lifetime access trust
- B trust
Creating A Bypass Trust
You can create a bypass trust either through a Will or as a component of a revocable trust. You can indicate in your Will that an executor should establish a bypass trust after the Will is probated following your death. Talk to an experienced estate planning lawyer to help you determine whether a bypass trust is right for your financial plan.
Why Use A Bypass Trust?
In the not so recent past, it used to be that a deceased person’s estate that could pass on to heirs other than a surviving spouse before taxes kicked in was $600,000. The tax rates at that time started at 40 percent. For example, if a married couple’s estate was $1 million, the value of the estate that would be left behind if one of them died would be $500,000.
The surviving spouse would inherit that $500,000 without paying the high taxes because that amount is safely below the $600,000 limit. However, if the surviving spouse died, the remaining estate would be one million which is over the $600,000 limit. That means the heirs set to inherit the $1 million will have to pay $40 percent in taxes.
But with a bypass trust, married couples can double the amount which would not be touched by taxes. The entire estate would pass to the couple’s children after the death of the surviving spouse because the assets in the trust will not be included into the surviving spouse’s estate. This trust also allows the surviving spouse to avoid probate, and the assets in the trust will not be subject to federal or state estate tax.
Bypass Trust Is Not Popular
Since the $600,000 limit was seen as too low, many people decided to divide their estates among their children and grandchildren during their lifetimes instead of relying on the bypass trust. So, legislators increased the limit to $5 million and then $11.4 million. Since many people inherit a significantly less amount than $11.4 million, they do not bother creating a bypass trust to escape estate taxes.
However, people with significant wealth that are in a second marriage can use a bypass trust to protect the inheritance of their biological children. This is useful in a situation where both partners in the second marriage have their own biological children. Talk to an experienced trust lawyer if you think that a bypass trust is suitable for your situation.