When it comes to leaving assets to a spouse, there are any number of different estate planning strategies available. How you achieve this goal depends upon your situation, including your tax liability. In many cases, where one spouse wants to protect the assets they leave to a spouse and minimize taxes, a bypass trust may be the solution, according to KAKE.com’s recent article, “How a Bypass Trust Works in an Estate Plan.”
A bypass trust, or AB trust, is a legal vehicle that permits married couples to avoid estate tax on certain assets when one spouse dies. When that happens, the estate’s assets are split into two separate trusts. The first part is the marital trust, or “A” trust, and the other is a bypass, family or “B” trust. The marital trust is a revocable trust that belongs to the surviving spouse. A revocable trust has terms that can be changed by the individual who created it. The family or “B” trust is irrevocable, meaning its terms can’t be changed.
When the first spouse dies, his or her share of the estate goes into the family or B trust. The surviving spouse doesn’t own those assets but can access the trust during their lifetime and receive income from it. The part of the estate that doesn’t go into the B trust, is placed into the A or marital trust. The surviving spouse has total control over this part of the trust. In addition, the surviving spouse can be the trustee of a bypass trust or designate another person as the trustee. It is the trustee’s task to make sure that assets from the couple’s estate are divided appropriately into each part of the trust. The trustee also coordinates asset management, as instructed by the trust.
This type of trust can minimize estate taxes for married couples who have significant wealth. For the family or B part of the trust, assets up to an annual exemption limit aren’t subject to federal estate tax. In 2019, the limit is $11.4 million or $22.8 million for married couples. If assets in the B trust don’t exceed that amount, they wouldn’t be subject to federal estate tax.
Holding assets in a bypass trust lets the surviving spouse avoid probate. Any assets held in a bypass or other type of trust aren’t subject to probate.
An experienced estate planning attorney will be able to tell you whether or not you need a bypass trust and if there are other strategies that might work better. They will also help you establish a last will and testament to distribute assets not included in the trust, name legal guardians if you have minor children and help create a living will or health care directive. These are all necessary for a complete estate plan that will protect those you love and leave behind.
Reference: KAKE.com (August 13, 2019) “How a Bypass Trust Works in an Estate Plan”