Readers who have some background knowledge in estate planning know that bypass trusts, a common estate planning strategy in previous years, has diminished in recent years as the estate tax exemption amount has increased.
Earlier this year, when the $5 million (plus adjustment for inflation) exemption amount and was made “permanent,” and estate tax portability was made permanent, the need for bypass trusts was reduced even further, at least for certain purposes. In addition to these factors, the rules governing bypass trusts have become more complex with the new law. With these changes, there is both less incentive for some people to utilize such trusts, and yet more incentive for other people to use them.
The reason for the increased attractiveness of bypass truss is that the new rules offer folks the chance to achieve even greater tax savings—not estate tax, but income tax. In short, the bypass trust offers the opportunity to be a vehicle of annual income tax savings. The reason for this is that trusts can distribute income to a beneficiary and thereby assign to them the duty of paying income on his or her income tax return. By making distributions to beneficiaries in the lowest income brackets, the trust can save income taxes.
To take advantage of this fact within the context of a bypass trust, one must name not only the surviving spouse but all the descendants as current beneficiaries.
Those who are interested in pursuing tax savings by means of a bypass trust further should speak with an experienced estate planning attorney.
Source: Financial Planning, “New Flexibility for Bypass Trusts,” Martin Shenkman, October 1, 2013.