Many Marin County Married Couples Have Antiquated Bypass Trusts That Need To Be Changed Now

Many Marin County Married Couples Have Antiquated Bypass Trusts That Need To Be Changed Now

Until recently, estate planning was mostly about avoiding or minimizing the dreaded estate tax.  From 2001 to 2009, the federal estate tax exemption amounts vary widely and unpredictably.  By way of example, in 2001, the estate tax exemption amount was $675,000 per person   In 2006, the estate tax exemption was $2 million per person, and in 2010 the estate tax was repealed all together.  On January 1, 2013, the 2012 Tax Relief Act was signed into law providing a “permanent” $5 million estate tax and gift tax exclusion per person (including an annual inflation adjustment), a 40% tax rate, and portability of unused exemption by the surviving spouse.  For 2016, the indexed exclusion amount is $5,450,000 per person and for 2017, it is $5.49 million per person, or approximately $11 million for a married couple.

So what does all this mean?  In 2016, an individual can leave $5.49 million to his or her heirs and pay absolutely no federal estate or gift tax.   Even better, a married couple will be able to combine both exemption amounts and shield approximately $11 million from federal estate and gift tax.

Prior to the significant tax changes in 2012, many estate planning attorneys routinely drafted bypass trusts (aka A-B trust, credit shelter trust or tax exemption trust) for married couples.   The trusts provided for the creation of subtrusts when the first spouse died.  In a typical AB trust, the “B” trust is funded with assets up to the amount of the exemption amount in the year of death.  Moreover, the “B” trust is irrevocable, which burdensomely requires a separate tax payer identification number and a separate accounting by the trustee.  The remaining assets are distributed to the “A” trust which is typically the survivor’s trust, and used for the surviving spouse’s lifetime.

Bypass trust receive special treatment and “bypasses” the surviving spouse’s taxable estate, passing the remaining trust assets to beneficiaries estate tax free.   These bypass trusts worked great when the federal estate tax exemption amounts were lower at $675,000 for 2001, and $2 million for 2006. But in 2013, all of this changed with the new era of significantly increased estate tax exclusion rates and the portability election.

Most married couples have a combined gross estate significantly less than $11 million.  According to the Joint Committee on Taxation, 99.8 percent of estates owe no estate tax at all.  Again, this is because of the significantly increased estate tax exclusion, which has jumped from $650,000 per person in 2001, to $5.45 million per person in 2016.   As a result, many of these bypass trusts are no longer needed for married couples.  However, many married couples still have these antiquated bypass trusts not knowing that this could lead to a very expensive and complicated mess on the incapacity or death of the first spouse.

When Should A Married Couple Update Their Trust Document Containing Bypass Trust Provisions?

The best time to amend and restate a trust containing a bypass trust is when both spouses are alive and have the requisite capacity.  When one spouse lacks capacity to amend and restate the trust, this often results in a complicated and expensive mess requiring court hearings, attorneys’ fees and ancillary costs.  When one spouse has passed away, the bypass trust becomes irrevocable.  Modifying an irrevocable trust is also a complicated and expensive mess requiring court hearings, attorneys’ fees and ancillary costs.

Matthew W. Harris, Esq., LL.M devotes a significant amount of his law practice to amending and restating antiquated bypass trusts for married couples.  Please feel free to contact The Law Offices of Matthew W. Harris for a complimentary estate plan consultation to see if amending and restating your old trust is a good option, before it is too late.

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