The bypass trust, also known as a credit shelter trust or an A-B trust, is a powerful estate planning tool designed to maximize the use of federal estate tax exemptions and minimize potential estate taxes. While its primary function is to shelter assets from estate taxes by utilizing each spouse’s lifetime exemption amount, it *can* also be structured to set aside funds specifically for the payment of estate taxes due at the second death. However, this isn’t automatic and requires careful planning and drafting by an experienced estate planning attorney like Steve Bliss. The current federal estate tax exemption is quite high – $13.61 million per individual in 2024 – but this is subject to change, and even estates below this threshold may face state estate taxes, making tax planning essential.
What happens if I don’t plan for estate taxes?
Ignoring potential estate taxes can lead to significant financial consequences for your heirs. Let me tell you about old Mr. Abernathy, a retired carpenter who believed his estate was “small enough” to avoid taxes. He passed away unexpectedly, and his estate, while not massive, included a modest home, some retirement accounts, and a life insurance policy. Due to a lack of planning, his estate faced substantial estate taxes, forcing his family to sell the home he’d spent his life building to cover the debt. This could have been avoided with a properly funded bypass trust! Approximately 5.2% of estates are required to file an estate tax return, even if no tax is ultimately due, highlighting the importance of proactive planning.
How does a bypass trust actually work for tax purposes?
When the first spouse dies, assets up to the then-current estate tax exemption amount are transferred into the bypass trust. This removes those assets from the surviving spouse’s estate, meaning they won’t be subject to estate taxes when the surviving spouse passes away. Crucially, the trust document can specifically direct the trustee to set aside a portion of the trust assets to cover any estate taxes that *might* be due on the surviving spouse’s estate. This “tax allocation” clause ensures that funds are readily available without having to liquidate other assets or force heirs to pay the taxes out of their inheritance. Without this provision, the trustee might need to sell assets at an unfavorable time to cover the tax liability.
Can I fund the bypass trust with anything I want?
Generally, you can fund the bypass trust with a variety of assets, including cash, stocks, bonds, real estate, and other property. However, it’s essential to consider the liquidity of those assets when planning for potential tax liabilities. Highly liquid assets, like cash and publicly traded stocks, are ideal for covering estate taxes, as they can be easily converted into cash without significant loss of value. I recall a situation where a client insisted on funding the trust primarily with a family-owned ranch. While the ranch held sentimental value, it was difficult to sell quickly and at a fair price, causing delays and complications in paying the estate taxes. A blended approach, combining liquid and illiquid assets, is often the most practical solution.
What happened when my client followed best practices?
Mrs. Elmsworth, a local artist, came to me deeply concerned about estate taxes impacting her children. We established a bypass trust funded with a mix of liquid assets and a portion of her valuable art collection. The trust document included a specific provision allocating funds for estate taxes. When her husband passed away, the trustee was able to seamlessly pay all estate taxes without disrupting the rest of the estate or forcing any asset sales. Mrs. Elmsworth’s children were incredibly grateful, not only for the financial security but also for the preservation of her legacy. It’s a testament to the power of proactive planning and a well-structured bypass trust. Estate planning isn’t about *avoiding* taxes entirely, it’s about minimizing them legally and ensuring your wishes are carried out efficiently.
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About Steve Bliss at Escondido Probate Law:
Escondido 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 Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
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.
● Free consultation.
Services Offered:
| estate planning | revocable living trust | wills |
| living trust | family trust | irrevocable trust |
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/oKQi5hQwZ26gkzpe9
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How does a living will differ from a regular will?” Or “What happens to jointly owned property during probate?” or “Does a living trust save money on estate taxes? and even: “Will I lose everything if I file for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.