subject: Is a Bypass Trust Still Necessary Under HR4853' Temporary Relief? [print this page] Is a Bypass Trust Still Necessary Under HR4853' Temporary Relief?
A bypass trust is generally used for married couples to allow for a double estate tax exemption, one exemption applicable to each spouse. Upon the death of one spouse, assets are held in a bypass trust, rather than passed outright to the surviving spouse. The assets held in this trust are allowed the maximum estate tax exemption. Similarly, the assets held in the surviving spouse's trust are also allowed the maximum estate tax exemption, one exemption per spouse. Therefore, with the$ 5 million estate tax exemption currently in effect, a married couple with an AB trust is protected up to $10 million, creating an effective tax shelter.
However, under HR4853, is this bypass trust still necessary with the incredibly high exemption at $5 million and the new provisions of HR 4853 Section 303(a), which allows for the applicable exemption "in the case of a surviving spouse, the deceased spousal unused exclusion amount?"
First, what does Section 303(a) mean for estate law? Prior to HR4853, the tax exemption system was a "use it or lose it" system. If no bypass trust was created, then all the assets of the deceased spouse were transferred to the surviving spouse and taxed under one applicable exemption allowed to the surviving spouse. Now, post HR4853, the surviving spouse is allowed to use the deceased spouse's unused exclusion amount whether a bypass trust is created or not. This effectively renders the bypass trust obsolete, in theory. Also, most people do not have estates worth over $5 million, which means only one exclusion amount is necessary for most couples.
Despite this movement toward allowing the use of a decease spouse's exclusion amount, a bypass trust is still necessary. HR4853 is temporary, as its title suggests. No one knows for certain if the same rules will be in effect a couple years from now. The estate tax exemption is applicable to the year a spouse dies, not the year in which a trust is created. In other words, it doesn't matter what the exclusion amount is for the year the trust was created, it matters what the amount is for the year in which a settlor dies; and as the exemption amount is constantly changing, it would be impossible to predict its future value. For example, if the temporary relief under HR4853 had not gone into effect, the exclusion amount for 2011 would have gone down to $1 million from the $3.5 million in 2010. Also, it is impossible to predict the future value of a couple's estate. A living trust is meant to grow with a couple; assets obtained along the way can be transferred into the trust. The creation of a bypass trust allows a couple to grow into the full double tax exemption should it be needed. Therefore, creating a bypass trust creates a safety net for higher exclusion amounts for couples in an ever-changing estate tax landscape and ensures family and loved ones the highest maximum estate tax exemption.
A bypass trust can also be used to prevent changes in the disposition of a spouse's portion of his/her community and separate property. Upon the death of a spouse, the bypass trust becomes irrevocable, while the surviving spouse's trust remains revocable. This means that the surviving spouse can continue to amend his/her portion of community property and separate property, but cannot change the deceased spouse's trust, which becomes the bypass trust upon death. The surviving spouse is usually still allowed reasonable access to the bypass trust, according to its terms. This is very important for couples with children from different marriages. Each couple has the ability to pass his/her portion of the trust assets to his/her own issue, with the assurance that post-death, disposition of these assets cannot be manipulated. Therefore, a bypass trust helps to maintain the disposition of assets according to an individual's intent, which is the primary purpose of a trust in the first place.
Despite HR483, a bypass trust is still necessary to ensure a couple the highest exemption from estate tax, allow the trust to grow with additional assets, and to ensure the disposition of the deceased spouse's assets according his/her intent.
