In the past, a fundamental part of estate tax planning was to imbed “bypass” trusts into wills. The purpose was to allow the surviving spouse to have the benefit of their spouse’s assets but not to have those assets merge into the survivor’s estate. So, when the estate tax exemption was only $1.5 million, incorrectly handled, a combined $2.5 marital estate could be taxed on the second spouse to die without a bypass trust. Many of these trusts were funded and have not yet been dissolved. If you have such a trust, it is time to reexamine them.
If you are a beneficiary of an existing bypass trust, you may want to consider whether distributing the assets from the trust is beneficial and possible.
What has changed? The estate tax exemption is now $11.58 million or $23.16 million per married couple. Most bypass trusts were funded with well less than $5 million.
These bypass trust no longer serve a purpose because no estate taxes will be due, regardless. So, should such trusts be shut down? It may be advisable. The advantages include less administration expenses and the possible big advantage – transferring appreciated assets out of the trust so those get a step-up in basis.
All appreciated assets get a step-up in basis, avoiding capital gains taxes on the appreciation, when transferred at death. Assets in a bypass trust aren’t “transferred on death” and do not get a step-up in basis. Therefore, if a bypass trust has appreciated assets, and the total estate is less than the current exemption, distributing the assets from the trust may have major tax advantages.
For more, contact Dallas Estate Planning Attorneys Pyke and Associates today.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
