The question of whether a bypass trust, also known as a credit shelter trust or B trust, can effectively preserve low-basis assets for a stepped-up basis at the surviving spouse’s death is a common concern in estate planning, and the answer is nuanced but generally yes, when properly structured. These trusts are designed to utilize the estate tax exemption – currently $13.61 million per individual in 2024 – shielding assets from estate taxes while still providing for the surviving spouse. However, achieving the desired stepped-up basis requires careful planning, especially concerning the type of assets held within the trust and how the trust is administered. A properly funded bypass trust can be an invaluable tool, but understanding its mechanics is crucial.
What happens to assets with a low cost basis?
Assets with a low cost basis—meaning the original purchase price was significantly lower than their current market value—accumulate substantial capital gains over time. When these assets are sold, the difference between the sale price and the cost basis is subject to capital gains tax, which can be quite significant. According to the IRS, long-term capital gains rates currently range from 0% to 20%, depending on the taxpayer’s income. If these assets are held within an irrevocable trust, like a bypass trust, until the grantor’s death, they receive a “step-up” in basis to their fair market value on the date of death, effectively eliminating those accumulated capital gains. This step-up can save the estate – and ultimately the heirs – a considerable amount in taxes. However, it’s important to note that this benefit only applies to assets included in the grantor’s gross estate.
How does a bypass trust impact estate taxes?
The purpose of a bypass trust is to keep assets out of the surviving spouse’s estate, thereby minimizing potential estate taxes. In 2024, the federal estate tax exemption is $13.61 million, but this number is slated to decrease significantly in 2026, potentially impacting more estates. By funding a bypass trust with assets up to the exemption amount, the estate avoids paying estate taxes on those assets. However, the trust must be properly structured as an irrevocable trust to achieve this benefit. Irrevocability means the grantor cannot alter or revoke the trust after it is established. This is a critical element, as a revocable trust would still be included in the estate for tax purposes. The trade-off for avoiding estate taxes is that the grantor relinquishes control over the assets held within the trust.
What went wrong for the Bakers?
Old Man Baker, a seasoned carpenter, built a beautiful cabin on a sizable plot of land decades ago, purchasing the land for a mere $5,000. By the time he passed away, the land and cabin were worth over $1.2 million. He and his wife, Sarah, had a trust, but it was a simple revocable living trust. When he passed, the entire estate, including the valuable land, was included in Sarah’s estate. She was then forced to sell the property to cover estate taxes and medical bills. Had they established an irrevocable bypass trust during his lifetime and properly funded it with the property, that $1.2 million would have received a stepped-up basis, eliminating the significant capital gains tax when Sarah sold it. They lost a substantial portion of the value of their legacy due to a lack of proactive estate planning.
How did the Millers get it right?
The Millers, anticipating potential estate tax issues, consulted with Steve Bliss, an estate planning attorney in Escondido, several years before Mr. Miller’s passing. Steve advised them to establish an irrevocable bypass trust and strategically fund it with their highly appreciated stock. Over the years, the stock increased significantly in value. When Mr. Miller passed away, the stock was shielded from estate taxes within the bypass trust. More importantly, his heirs received the stock with a stepped-up basis equal to its fair market value on the date of his death, avoiding substantial capital gains taxes when they eventually sold it. “We were so grateful for Steve’s guidance,” Mrs. Miller shared. “He not only helped us minimize taxes but also ensured our children would inherit a substantial legacy without a huge tax burden.” This careful planning turned a potentially costly situation into a seamless transfer of wealth, preserving their family’s financial future.
“Effective estate planning is not just about avoiding taxes; it’s about protecting your legacy and ensuring your wishes are carried out.” – Steve Bliss, Estate Planning Attorney.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
estate planning
living trust
revocable living trust
family trust
wills
banckruptcy attorney
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/oKQi5hQwZ26gkzpe9
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “Can estate planning help protect a loved one with special needs?” Or “What is probate and why does it matter?” or “What should I do with my original trust documents? and even: “How does bankruptcy affect co-signers on loans?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.