What is a Bypass Trust?
A bypass trust, also known as a credit shelter trust, is a long-term planning device. If you leave property to someone in the form of a bypass trust, that property will not be subject to estate taxes when that person dies. (The property will still be taxed in your estate, however; to save tax in your own estate, other methods must be used.) A bypass trust is particularly useful for spouses who plan their estates together. By leaving property to each other in bypass trust form, they can guarantee that the property will only be taxed once between the two of them. To effectively save taxes, a bypass trust must follow certain rules laid out by the IRS. Let’s suppose your will sets up a bypass trust for your spouse, and you die first.
A Bypass Trust, sometimes called a Life Estate or A-B Trust, is a way for couples of combined estates of more than $1 million (2002 and 2003) to be exempt from estate tax if one or the other dies. This amount, which is exempt from Federal Estate Tax, increases to 1.5 million in 2004 and 2005, 2 million in 2006 through 2008; 3.5 million in 2009 and then in 2010 there is no federal estate tax. However in 2011 the Federal Estate Tax is returned to the 2002 level. A Bypass Trust is designed to let the $1 million tax exemption be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent`s estate free of estate tax. The surviving spouse never legally owns the property within the Trust because it`s legally owned by the Trust. The spouse can use the assets and property within the estate with certain restrictions. However, when the surviving spouse dies, if the estate is worth more than $1 million, a significant amount of estate taxes will be due
The bypass trust is often part of the overall strategy that is employed with arranging for the orderly transfer of properties and assets in the event of death. Generally, a bypass trust is arranged to allow this transfer from a parent to a child or in some cases from one spouse to another. There are several typical provisions that are included in this type of irrevocable trust that help to ensure that the intentions of the deceased are carried out properly. Essentially, bypass trusts help to ensure that the estate is arranged so that the estate taxes are kept within reason, and that the assets of the estate are used in a manner that is within the terms outlined by the deceased. A bypass trust normally works to establish a set of conditions that will provide for loved ones over the long term. To this end, there are usually provisions that control the amount of withdrawals from the trust over time, as well as protecting the assets within the trust in the event that the beneficiary of the
A bypass trust is a trust that is typically formed after the death of the first spouse in a marred couple. Initially, one may think to just to give all the assets to the surviving spouse, but then when the the survivor passes away, all the assets pile up and have a large estate tax. A bypass trust, also called a unified credit shelter trust, or an applicable exclusion trust, can hold up to $2 million in assets (2008, scheduled to increase in 2009 to $3.5 million), and the surviving spouse can withdraw assets as they need. Note, for state estate tax purposes a lower amount is required. Who should be a beneficiary? 1. Spouse only. This is simplest and most security for spouse. 2. Spouse and children. Making distributions to kids is a great way to keep surviving spouses estate small, while still protecting him/her if he/she needs it. Be careful though if there are kids from a previous marriage. In that case consider naming an independent trustee. 3. Spouse, children and others. Others mig
A bypass trust is an estate planning device used to minimize the combined estate taxes payable by spouses. The bypass trust is also known as the credit shelter trust. Under the will, at the death of the first spouse, the estate is divided into two parts. One part, equal to the applicable exclusion amount sheltered from tax by the applicable credit amount, is placed in a trust that may provide liberal benefits to the surviving spouse, but will bypass his or her estate at death. The other part either passes outright to the surviving spouse, or is placed in a marital deduction trust for the spouse’s benefit. The general idea is to make full use of the applicable credit amount at each death. If everything passed outright to the surviving spouse at the first death, it could all be subject to estate tax at his or her later death. But by using the applicable credit amount to shelter assets at the first death, this amount (and more if the property has gone up in value) can escape estate taxati
