The bypass trust, now more commonly referred to as an A-B trust or credit shelter trust, is a powerful estate planning tool designed to take advantage of the federal estate tax exemption, and yes, it can absolutely be structured to set aside funds for estate taxes due at the second death. Historically, this was crucial, as the exemption amount was significantly lower, and many estates would have been subject to federal estate tax. While the exemption has increased dramatically – currently at $13.61 million per individual in 2024 – the bypass trust still provides valuable benefits for larger estates, asset protection, and continued estate planning control. It operates by funding a trust with an amount equal to the then-current estate tax exemption at the first spouse’s death, shielding those assets from estate tax at the surviving spouse’s death.
What happens if I don’t plan for estate taxes?
Failing to plan for estate taxes can result in a significant portion of your assets being lost to taxes, rather than passing to your loved ones. Consider that roughly 0.2% of estates are actually required to file an estate tax return, but the consequences for those that are can be severe. Without proper planning, your heirs could face a hefty tax bill, potentially forcing them to sell assets to cover the costs. For example, I once worked with a couple, the Millers, who believed their estate was well under the exemption amount. Unfortunately, they hadn’t factored in the value of a rapidly appreciating vacation home and life insurance policies. When the husband passed, the estate was unexpectedly over the exemption, resulting in a substantial tax bill and a difficult, stressful process for the widow.
How does a bypass trust actually work?
The bypass trust functions by splitting the deceased spouse’s assets into two trusts: the bypass trust (also known as Trust A) and the marital trust (also known as Trust B). The bypass trust receives an amount equal to the estate tax exemption, and the assets within this trust are not included in the surviving spouse’s taxable estate. The marital trust, on the other hand, contains the remaining assets and allows the surviving spouse to receive income from the trust for life, with the principal ultimately passing to the beneficiaries. “It’s like building a fence around a portion of your estate,” one client described it to me, “protecting it from the potential reach of estate taxes.” The surviving spouse typically serves as trustee of both trusts, maintaining control over the assets.
What if the estate tax exemption changes?
One of the concerns with bypass trusts, especially in the current tax landscape, is the possibility of changes to the estate tax exemption. If the exemption amount were to decrease significantly, assets previously sheltered in the bypass trust could become subject to estate tax. To mitigate this risk, some estate planning attorneys are opting for portability, allowing the surviving spouse to utilize any unused portion of the first spouse’s exemption. However, a bypass trust still offers a degree of control and can be structured with a “disclaimer” provision, allowing the surviving spouse to disclaim assets if the exemption decreases. I remember assisting a family where the husband had established a bypass trust years ago. When he passed, the exemption had actually *increased* significantly. The trust allowed them to take advantage of the higher exemption, shielding even more assets from taxation.
Can a bypass trust also protect assets from creditors?
Beyond estate tax planning, a properly structured bypass trust can offer asset protection benefits for the beneficiaries. Once assets are transferred into the trust, they are generally shielded from the beneficiaries’ creditors. This can be particularly important for beneficiaries who are in high-risk professions or have significant potential liabilities. In one instance, I helped a client, a physician, create a bypass trust for his children. Years later, one of his sons faced a lawsuit related to his business. Fortunately, the assets held in the trust were protected, preventing them from being seized to satisfy the judgment. It’s important to note that the level of asset protection can vary depending on state laws and the specific terms of the trust, but a well-drafted bypass trust can be a valuable tool in safeguarding your family’s wealth.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
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.
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Map To Steve Bliss Law in Temecula:
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Wildomar Probate Law36330 Hidden Springs Rd Suite E, Wildomar, CA 92595
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Feel free to ask Attorney Steve Bliss about: “What happens to my social media and online accounts when I die?” Or “Do I need a lawyer for probate?” or “Can a living trust help manage my assets if I become incapacitated? and even: “How does bankruptcy affect my credit score?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.