In the past few decades, the Bypass Trust, also known as the A-B Trust, has been a popular estate planning mechanism for married couples as a way to take advantage of both spouses’ exemptions to maximize the amount of property that could be transferred without being subject to estate taxes. However, changes to state and federal estate tax regulations have made much of the purpose for these estate planning vehicles obsolete.
Under the American Taxpayer Relief Act, the surviving spouse can combine the federal estate tax exemption for both spouses without the need for any special A-B subtrust planning. Additionally, the exemption amount from federal estate tax has increased enormously. The total exemption for federal estate tax purposes is $5.43 million per person for deaths in 2015.
A-B Trusts also place significant burdens and responsibilities on a surviving spouse. After the death of the first spouse, the B Trust becomes irrevocable, meaning the surviving spouse cannot alter the trust in any way. The surviving spouse’s use of the assets in the B Trust are also very limited. While the surviving spouse can receive income from the B Trust’s assets, he or she is typically not entitled to the principal of the assets.
Perhaps most importantly, the surviving spouse is responsible for maintaining records and properly allocating property into the B Trust after the first spouse’s death. Any mismanagement or comingling of funds between the A and B trusts by the surviving spouse could result in litigation between future beneficiaries or trustees of the A trust and the B trust after the surviving spouse’s death.
With all that being said, A-B Trusts can still be beneficial in certain instances, including protecting trust assets from the surviving spouse’s creditors and offering the first spouse to die a degree of control over the final disposition of trust assets. The attorneys at Boyd Law understand that the goals of each client are unique, and we have the knowledge and experience to ensure that your assets are protected. To learn more about various estate planning strategies and which one is best for you, call us today for a free consultation.
TAX ADVICE NOTICE: Boyd Law does not provide tax advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice.