Published on:

Palm Springs Estate Planning Attorney discusses the Bypass Trust and the 2010 Tax Laws

Many Coachella Valley residents have revocable trusts which include a provision for a “bypass trust” otherwise known as an “A/B split trust.” Some residents are considering amending or restating their trusts to remove this provision. Although this may seem wise, there are numerous reasons why these provisions are still important today.

Under the old estate tax laws, every individual had an exemption amount of $3,500,000 but married couples also enjoyed an unlimited marital deduction. Therefore, if Warren Buffet wanted to give his entire estate to his Spouse, no estate tax would be due until her death. Unfortunately, he would have lost his personal estate tax exemption and higher estate taxes would be paid upon the Spouse’s death. However, if Mr. Buffet funded a bypass trust with his personal exemption amount ($3,500,000 in 2009) then this amount would still be available for the wife to use for her health, education, support and maintenance AND it would be exempt from estate taxes. In this scenario, Warren Buffet’s wife saved $1,575,000 in estate taxes that would otherwise have been paid to the US Treasury upon her death.

In December 2010, a new law was passed and the estate tax exemption was raised to $5,000,000. Additionally, the exemption is “portable” to Surviving Spouses so even if the first spouse doesn’t use up the whole $5,000,000 the unused portion is passed onto the Surviving Spouse. Thus, a Surviving Spouse can effectively have an exemption amount in excess of $5,000,000. With these higher exemption amounts and the option to “port” any unused exemption, why would you still need a bypass trust?

There are many reasons why bypass trusts are still important tools in most estate plans. First, the new estate tax laws are temporary. They are scheduled to expire in 2013 along with the $5,000,000 exemption and the notion of portability. The exemption amount will fall to $1,000,000 on January 1, 2013. Second, bypass trusts remain excellent mechanisms for ensuring where some money eventually gets distributed. Although Surviving Spouses have access to the funds in a “bypass trust” they cannot change who the ultimate beneficiaries are, nor can they frivolously or lavishly spend down these funds. Third, under most circumstances the bypass trust is a great way to protect assets for the children of one Spouse when there is a second marriage. Fourth, assets in a bypass trust cannot be reached by creditors of a Surviving Spouse.

Although getting rid of that bypass trust provision may seem like a good way to simplify your estate plan, prudent estate planning attorneys would advise keeping this provision until more permanent estate tax laws are in place.

If you would like a knowledgeable estate planning attorney to review your estate plan and discuss the advantages of a bypass trust we at Julia Burt Law are happy to help. We are conveniently located in Palm Desert and serve clients in the entire Coachella Valley.