DO I NEED A BYPASS TRUST?
It’s easy to tell whether you need a bypass trust. With your spouse, do a quick addition of everything you own—any expected life insurance proceeds due on policies owned by you or your spouse, the equity in your house, your retirement accounts, additional investments, your cars, everything. Now subtract any money you owe. If, to your amazement, your assets are worth $600,000 or more, then, yes, you need a bypass trust.
Think you’re a long way from needing a bypass trust? Repeat the calculations from time to time, perhaps when you do your taxes every year. Your mortgage is closer to being paid off. Your retirement funds are growing. Maybe you inherited a little money here or there. No matter how much you have— even $10 million—your spouse will be okay if you die first; spouses, remember, can inherit billions without paying estate tax, as long as they are U.S. citizens. But once your spouse dies as well, or if the two of you happen to die together and you have more than $600,000, it’s estate tax time—unless you have this trust. The minute you’re lucky enough to hit that $600,000 mark, unless you plan to leave all your money to a charity, you need a bypass trust.
I am very serious about this. I always urge my clients who fall short of the $600,000 mark but are getting up there to set up a bypass trust. You never know when a two can become a one, so I don’t chance it. A bypass trust will cost about $1,500 in attorney’s fees to set up, unless you own a lot of real estate and have lots and lots of cash, in which case it will cost more, or unless you’re just amending a revocable living trust you already have, in which case it will cost less. But wouldn’t you rather leave your hard-earned money to your loved ones than to the IRS?
In the case of Sherry’s family, because Tim and Daniel will eventually die, Tim and Daniel should also set up a revocable living trust, setting up in turn a bypass trust; what’s good for the goose is good for the gander. Tim’s and Daniel’s children should not have to go through what their fathers are going to go through if Mom and Pop don’t take action. At the very least, the brothers should each have a revocable living trust that leaves the business to each other but their share of the income it generates to Sherry and Christine.
They should also think hard about what they want. Let’s say that one of the wives predeceases her husband. Maybe that brother will want his share of the business to go directly to his kids, not to his brother. If there isn’t some provision for this, the first brother to die might leave his children with nothing. I am sure that Tim and Daniel don’t intend to deny their children an inheritance, but the way their estates are set up right now, that might well be what happens.