Using An A/B ‘Bypass Trust’ To Avoid Double Estate Taxation

My Spouse And I Maintain Assets Approaching The Federal Estate Tax Threshold. Should We Look Into Transferring Our Assets To Trust?

Currently, the federal government may impose an estate tax on transferred assets of $5.43 million per individual, or $10.86 million per couple, with a top taxation rate of 40 percent. For higher net-worth couples, a 40 percent tax rate on their hard-earned wealth is simply unthinkable – and fortunately, there are strategies available to avoid this type of tax burden for both the surviving spouse and the ultimate beneficiaries.

An experienced estate planning attorney, such as Gerald Winters, can help you best meet your financial goals. One option many couples have chosen when dealing with this situation is creating a bypass trust. These trusts, also known as A/B trusts, will address the death of each spouse individually, obviously beginning with the death of the first spouse. Assuming the trust is properly funded, the death of the first spouse will trigger a division of assets into one of two sub-trusts. Sub-trust A will be held for the benefit of the surviving spouse, and is accessible to him or her as needed for the duration of his or her life. Sub-trust B will hold assets in an amount, which does not exceed the federal or state tax threshold, and will remain in trust for the benefit of named beneficiaries, other than the surviving spouse. This way, when the surviving spouse passes away, the contents of Sub-trust B will bypass his or her gross estate for the benefit of the couple’s children or next-of-kin and escape any valuation for estate tax purposes.

Executing an A/B or bypass trust has additional benefits aside from estate tax savings. Probably one of the biggest benefits of an A/B trust is the ability to skip the probate process upon the death of the second spouse, which will save a significant amount of time and unnecessary expenses. In addition, managing trust assets through the use of a trustee helps to maintain family privacy – particularly upon the distribution of real estate and other titled assets.