The uses of bypass trusts

Married couples in Oklahoma whose combined taxable estates are potentially greater than the estate tax exemption sometimes turned to a bypass trust as a way of protecting their assets. A bypass trust involves balancing the value of their two estates against each other before either partner dies and then implementing two wills that mirror each other.

Bypass trusts require that both wills be made out to split their portion of the estate into two shares. Shares from each will that are pegged to the size of the exclusion appropriate for to them and kept in the form of a life estate for the surviving spouse. The remainder goes to the beneficiaries designated, which most typically means any children of the marriage.

The second share is passed directly to the spouse. This reduces the estate tax on the deceased spouse's estate to nothing and minimizes the tax burden for the surviving spouse. However, now that an unused exemption from the first spouse's death is portable, a simpler approach to the will may be justified. If the children who stand to inherit are adults and capable of handling a large bequest, then it may not be necessary to use a trust at all. Portability may also be desirable to use if the combined spousal estate is less than twice their unified credit's equivalent exemption.

Married couples seeking to reduce the tax burden on their estate might wish to consult a lawyer who is familiar with estate planning strategies. That lawyer might be able to guide them through the complex options for wills and trusts that may apply to their situation and might enhance their estate plan.

Source: Agri-view, "Should a bypass trust be used as estate planning tool?", September 05, 2014

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