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As the famous quote goes, “In this world nothing can be said to be certain, except death and taxes.” Well, perhaps Benjamin Franklin should have added a third: changes in the law.
I often meet with married clients seeking to have their Estate Plan from the early 2000’s reviewed because, well, life changes over the course of a decade (by the way – always review your Plan at least every three years). It was very common in the early 2000’s for married couples with probate avoidance plans (I.e., Living Trusts) to have a family trust that would be split into two separate trusts after the death of the first spouse: a Decedent’s Trust (also known as a “Bypass Trust”) and a Survivor’s Trust. . Frankly, it made sense for the time because of the tax and estate laws at that time. However, recent changes in the law have made it more practical to leave the trust unified, even after the death of the first spouse. But, it’s not a great idea for everyone.
1. No additional income tax return would be required for the Bypass Trust after the death of the first spouse.
2. The surviving spouse continued to own all of the property during their lifetime; and
3. On the death of the surviving spouse, there will be a step-up in basis on all of the assets held in the trust on the surviving spouse’s death with a simplified/unified trust. With the Bypass/Survivor trust split, the assets in the Bypass Trust will not be included in the surviving spouse’s estate at their death and will result in no step-up in basis for those assets. The step-up in basis with the simplified trust allows the beneficiaries to avoid a potentially substantial capital gains tax hit when they sell the assets.
1. The Bypass Trust provides protection from creditors because it’s an irrevocable trust. THe creditors of any beneficiaries would not be able to attach the trust assets of they got in trouble;
2. The Bypass Trust ensured that the property of the first to die passed to their descendants – I.e., no risk that the surviving spouse could spend or waste all of the trust assets during their lifetime;
3. The Bypass Trust protects against the mental decline of the surviving spouse be preventing the transfer of the Bypass Trust assets by the surviving spouse;
4. The Bypass Trust provides tax benefits for larger estates, removing the trust assets from the decedent’s taxable estate.
It’s always important to weigh the pros and cons of your estate planning options with an attorney before moving forward. Some families may prefer a simplified trust, but the Bypass Trust has substantial utility still, especially in mixed families and families with high net worth.