For married couples, the primary goal of estate planning often revolves around maximizing the transfer of assets to loved ones while minimizing the impact of estate taxes. The federal estate tax, while it has a high exemption amount—$13.61 million per individual in 2024—can still significantly impact larger estates. A bypass trust, also known as an AB trust or credit shelter trust, is a sophisticated estate planning tool specifically designed to address this concern. It functions by dividing a married couple’s estate into two trusts: Trust A (the bypass trust) and Trust B (the marital trust). The bypass trust holds assets up to the estate tax exemption amount, shielding those assets from estate taxes when the first spouse dies. This strategy is predicated on the concept of portability, allowing the surviving spouse to utilize any remaining exemption amount of the deceased spouse. While the Tax Cuts and Jobs Act of 2017 significantly increased the estate tax exemption, making bypass trusts less universally necessary, they still offer benefits for couples with estates approaching or exceeding the exemption level, or those wanting to ensure estate tax minimization regardless of future legislative changes.
What happens if I don’t plan for estate taxes?
Failing to plan for estate taxes can lead to a substantial reduction in the assets available to your heirs. Currently, the federal estate tax rate can reach up to 40% on amounts exceeding the exemption. For example, an estate valued at $15 million, without any estate planning, could face an estate tax liability of over $1.2 million. “Approximately 0.05% of estates file an estate tax return,” but the consequences for those that do can be severe. Furthermore, state estate taxes add another layer of complexity; several states have their own estate or inheritance taxes, potentially reducing the total amount passed on to beneficiaries. This doesn’t even factor in the costs associated with probate—the legal process of validating a will and distributing assets—which can be significant, potentially costing 5-10% of the estate’s value. Proper planning, including the use of tools like bypass trusts, can mitigate these costs and maximize the inheritance for your loved ones.
What went wrong for the Harpers without a bypass trust?
I once worked with a couple, the Harpers, who were successful business owners with an estate nearing the estate tax exemption. They had a basic will but hadn’t considered a bypass trust. Mr. Harper passed away unexpectedly, and his estate was subject to federal estate taxes, significantly reducing the inheritance for his wife and children. Because their estate wasn’t structured with a bypass trust, the entirety of the estate was subject to estate tax calculations. Mrs. Harper was left struggling to maintain their lifestyle and fund her children’s education, deeply regretting their lack of proactive estate planning. She felt overwhelmed navigating the legal process and facing substantial tax liabilities, a burden that could have been largely avoided with a properly structured trust. It was a difficult situation, demonstrating the real-world consequences of neglecting estate tax planning.
How did the Johnsons benefit from a bypass trust?
Contrast that with the Johnsons, another couple with a similar estate value. They consulted our firm and implemented a bypass trust. When Mr. Johnson passed away, the assets in the bypass trust—equal to the estate tax exemption amount—remained sheltered from estate taxes. This meant that only the assets above the exemption amount were subject to taxation. The remainder of their assets were placed in a marital trust, allowing Mrs. Johnson to continue benefiting from those assets during her lifetime, with the understanding that they would eventually be distributed to their children. The bypass trust effectively shielded a significant portion of their estate from taxation, preserving substantial wealth for future generations. “A well-structured bypass trust can be a powerful tool for wealth preservation,” ensuring that your assets are distributed according to your wishes while minimizing tax liabilities.
Is a bypass trust still relevant with the increased estate tax exemption?
While the current high estate tax exemption provides some breathing room for many estates, a bypass trust isn’t necessarily obsolete. The exemption is subject to change with future legislation, and it’s prudent to have a plan in place to protect your assets from potential tax liabilities. Moreover, bypass trusts offer benefits beyond simply avoiding estate taxes. They can provide asset protection, ensure the financial security of surviving spouses, and facilitate smooth estate administration. They also offer flexibility—allowing trustees to adapt to changing circumstances and beneficiary needs. Given the potential for future tax law changes and the multifaceted benefits they offer, bypass trusts remain a valuable estate planning tool for couples seeking to maximize wealth transfer and protect their legacies.
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About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
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
irrevocable trust
Map To Steve Bliss Law in Temecula:
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Address:
The Law Firm of Steven F. Bliss Esq.43920 Margarita Rd ste f, Temecula, CA 92592
(951) 223-7000
Feel free to ask Attorney Steve Bliss about: “How do I talk to my family about my estate plan?”
Or “What happens to minor children during probate?”
or “Is a living trust private or does it become public like a will?
or even: “Can I keep my car if I file for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.