A bypass trust may be useful for New York couples with assets exceeding the federal estate tax exemption of $5.3 million. Such a trust reduces estate taxes to nothing or almost nothing on the decedent’s side while lowering estate taxes for the surviving spouse. This is done by splitting the couple’s assets into two shares. The first share is roughly equivalent to the federal estate tax exemption and is left in the estate.
Whatever is left over that exceeds this exemption amount is generally passed down to surviving children. The other share is left in the estate and is given to the surviving spouse with that share qualifying for the marital deduction. While this may be a savvy move to reduce estate taxes, it may not be the best move in the age of portability.
Portability allows the surviving spouse the ability to use any unused portion of the other spouse’s exemption. Therefore, it may be possible for the other spouse to claim up to $10.68 million in estate tax exemptions in 2014 as opposed to $5.3 million. Estates that are located in a state with no estate or inheritance tax may also find this easier than creating the bypass trust. However, the bypass trust may be worthwhile for those attempting to protect assets for future generations.
There are many issues to consider when estate planning. For couples with a high net worth, it may be worthwhile to talk to an attorney about bypass trusts or other tools that can be used to reduce estate taxes. It may also be worthwhile to create a trust to protect assets for future generations or to avoid the probate process. An attorney may be able to talk about the benefits of trusts and how they can protect the value of an estate.
Source: Agri-view, “Should a bypass trust be used as estate planning tool?“, September 05, 2014