Archive for April, 2009

If Sherry’s family were to set up a bypass trust now, before Mom or Pop died, the scene that would inevitably play itself out would be a much, much brighter one.

In the first place, Mom would retain control over everything she and Pop worked for without any court intervention. When she died, Tim and Daniel would inherit the shares in the company—and would not owe one penny of estate taxes for the first $1.2 million they inherited. (After that, they’d have to pay somewhere between thirty-seven and fifty-five cents for every additional dollar they inherited.) In this scenario, rather than owing $150,000 in estate taxes, they would owe nothing. Zero. And you can add in another $44,000 of savings, because neither probate fees nor court costs would be owed, either. For estates valued at more than $600,000, this is an urgent matter.

This plan will not work unless it’s put into place before one of the spouses dies. How? Simple. You amend your revocable living trust (or will, but I hope you’ll have a trust) to specify that after one or the other of you dies, the assets from his or her half of the estate will be put into a new trust, this bypass trust. In effect, you’re putting the money from a revocable trust into an irrevocable trust, because the ultimate beneficiaries have been specified by the spouse who has died, and they cannot be changed.

In the majority of states the revocable living trust is the original trust created jointly by the two spouses. It is the instrument that enables the surviving spouse, after the first one has died, to divide the estate into two shares, the survivor’s trust and the bypass trust. In the revocable living trust, set up while you’re both alive, you specify what happens when one spouse dies and the other is still living and then what happens when both spouses have died.

In some states, however—and check with your estate planning attorney on this—it is better to use two individual trusts from the beginning, one for the husband and one for the wife. It works the same way, though. The trust set up by the first person to die becomes irrevocable on death but provides that the assets are held for the benefit of the surviving spouse for his or her lifetime. The surviving spouse’s trust continues on the way it always has. After the death of the surviving spouse, it pays out, from both parts of the bypass trust, what’s promised to the beneficiaries. In community property states we start with a revoca

Be living trust, which provides for what happens when one spouse dies and when both die, and the trust specifies that the revocable living trust can be split into two trust shares upon the death of the first spouse. The trust continues on as it always has, but you must create the bypass trust at the first death.

After the first spouse dies, the surviving spouse will have to carefully value everything, all the marital assets, and divide them up, at least on paper. (In order to get the maximum benefit in capital gains treatment if you ever want to sell appreciated assets in the future, you’ll need to get a valuation on your assets sooner or later anyway.)

This will require the assistance of a good attorney. If the attorney can’t explain the plan to you in a way that you can understand completely, then go to someone else. Don’t pay the attorney until all your questions have been answered. If someone tells you it’s too technical to explain, most likely they don’t understand it, either. There are some technical points, but there is no reason you can’t understand the main terms of the trust and why it says what it does.

In the case of Sherry’s family, if Pop or Mom dies before they can be persuaded of the value of a bypass trust, it will be too late and the error will be costly.