Married California residents who are looking for a way to preserve their estates after they pass away have sometimes turned to the bypass trust. However, with recent revisions to estate tax law and portability of exemption rules, a bypass trust may not necessarily be the most efficient method of estate protection.
Bypass trusts are a tool that is often used by married couples who have a combined marital estate that is larger than the exemption equivalent for one of the spouses by themselves. The purpose of the trust is to avoid estate taxes because to death of a spouse may result in a decrease in a couple's exemption. Using this strategy, the wills of the two parties mirror each other and act in a concerted fashion to provide shelter to the estate.
When one of the individuals passes away, a certain amount of assets is passed to the surviving spouse in life estate form. This share is dependent on the size of their applicable exclusion, which is as much as $5.34 million under current law. The remainder is passed directly to the spouse. However, now that an unused exemption from the first spouse's demise is portable to a surviving spouse, the combined exemption of $10.68 million is more than enough for a wide variety of Californians, and a bypass trust may not be necessary.
The guidance of an attorney can be of use to those who wish to file complex trusts and wills, especially those which require coordination between two parties. Clarity and understanding of obscure provisions of the law can make the difference between real long-term protection for an estate and unwarranted tax exposure.
Source: Agri-View, "Should a bypass trust be used as estate planning tool?", September 05, 2014