Use bypass trust to minimize estate taxes, postpone distributions

Q: My spouse and I have grown children from previous marriages. We don't want to make distributions to our children or charities until after we are both deceased, but we do want to minimize the amount of taxes on our combined estate. Will a bypass trust help us with these objectives?

A: Yes. A bypass trust is a tool married couples use to minimize the estate tax that will be due on their combined estates. It gives the surviving spouse the ability to benefit from their combined wealth until he or she is deceased. On the death of the first spouse, assets held in that spouse's name individually are directed to fund the bypass trust up to an amount equal to his or her federal applicable exclusion amount, which currently is approximately $5 million for an individual. The remaining assets of the first spouse to die can be transferred either outright to the surviving spouse or into a marital (or "Q-TIP") trust for the benefit of the surviving spouse.

For the bypass trust to work properly, it is important for you and your spouse to ensure that your assets are titled in individual names and not held jointly or in trust for the survivor. That way, the assets of the first of you to pass away would be available to fund the bypass trust. The trust could provide for income distributions to the surviving spouse and allow or restrict principal distributions to the surviving spouse. Then, on the passing of the second spouse, the bypass trust would terminate and assets would be distributed according to your wishes and intentions. A bypass type of trust generally is created on the death of the first spouse and is directed to be created in the will or other testamentary document of each spouse.

Answers to our readers' questions were provided by Lawrence B. Keller, CFP, CJU, ChFC, founder of Physician Financial Services in Woodbury, New York, and Michael J. Hausman, JD, partner with the law firm Karol Hausman & Sosnik P.C. in Garden City, New York. Send your money management questions to medec@advanstar.com
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