Articles Posted in 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.
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For family members, lawyers and accountants of heirs of decedents dying in 2010, there is some relief from the IRS regarding filing requirements. On March 31, 2011 the IRS issued a statement explaining that the new Form 8939 will not be due on April 18, 2011. Instead, the form will be due in the near future but would allow for reasonable time for administrators of estates to prepare and file the form. Currently, there is no final version of Form 8939 available for administrators to use and previous statements from the IRS have indicated that the form will be due 90 days after the final version is released.

Form 8939 allows administrators of estates to opt-out of estate taxes. Since the United States has effectively had some form of estate taxes since the late 1790s, this comes as a foreign concept to many accountants and lawyers. The new form allows administrators to allocate basis of property acquired from a decedent for income tax purposes. Additionally, because it is an “opt-out” process, certain estates may choose to “opt-in” to the current estate tax laws. The current laws allow an exemption of $5 million and thus it is only estates valued at over that amount that would benefit from the “opt-out” procedure.
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Palm Desert taxpayers will be affected by the new tax laws enacted after much debate and Congressional theatrics at the end of 2010. Many of the sunset provisions of 2010 have been temporarily extended while new laws for gifts and estate taxes have been imposed.

An important note to highlight is that many of the following provisions are temporary. They are currently set to expire at the end of 2012 at which time they will revert back to 2001 levels. This potentially means we may have to endure another Congressional battle similar to last year’s debacle but this time it will be in the middle of an election year. Due to the changing nature of these laws, it is imperative that you ensure that your estate plan conforms to current laws.

Estate and Gift Taxes

State Bar of California
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