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Sacramento CA Estate Planning Blog

Wednesday, August 1, 2012

Changing Uses for Bypass Trusts

Changing Uses for Bypass Trusts

Every year, each individual who dies in the U.S. can leave a certain amount of money to his or her heirs before facing any federal estate taxes. For example, in 2010, a person who died could leave $3.5 million to his or her heirs (or a charity) estate tax free, and everything over that amount would be taxable by the federal government. Transfers at death to a spouse are not taxable.

Therefore, if a husband died owning $5 million in assets in 2010 and passed everything to his wife, that transfer was not taxable because transfers to spouses at death are not taxable. However, if the wife died later that year owning that $5 million in assets, everything over $3.5 million (her exemption amount) would be taxable by the federal government. Couples would effectively only have the use of one exemption amount unless they did some special planning, or left a chunk of their property to someone other than their spouse.


Late last year, Congress changed the estate tax rules. For the years 2011 and 2012, each person who dies can pass $5 million free from federal estate taxes. In addition, spouses can combine their exemption amounts without requiring a bypass trust (making the exemptions “portable” between spouses). This change in the law appears to make bypass trusts useless, at least until Congress decides to remove the portability provision from the estate tax law.



(2)  State estate taxes. Currently, 13 states as well as Washington D.C. have state estate taxes. If you live in one of those states, a bypass trust may be necessary to combine a couple’s exemptions from state estate tax.






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