There are several estate planning tools that allow one spouse to pass their estate to another, minimizing the estate tax burden upon their death. But which is the better option: A Marital Deduction Trust or a Bypass Trust? Find out from Max Alavi APC, OC Trusts Lawyer.
Advantages of Marital Deduction Trusts and Bypass Trusts in Minimizing Federal Estate Taxes
One of the most important estate planning tools available to married couples is the federal estate tax marital deduction. Basically, this provision allows a married couple to leave all or a portion of one spouse’s estate to the surviving spouse, deferring federal estate taxes. Beneficial though this may be, it’s important to understand that it is just a deferment, not a reduction of the overall tax burden. In other words, the federal estate taxes must still be paid by the estate once the second spouse dies.
A living trust attorney may recommend a Marital Deduction Trust in order to curb some of the negative effects of passing an estate to a surviving spouse, including the payment of estate taxes. The deduction can be great for allowing the surviving spouse to access the full value of the estate, up until their death. Still, advanced planning is needed in order to mitigate the tax obligations that are deferred to the eventual beneficiary.
Another Option: The Bypass Trust
In addition to the Marital Deduction Trust, living trust attorneys may also recommend the Bypass Trust. A Bypass Trust is so named because it makes it possible to bypass the surviving spouse in favor of other beneficiaries (usually children or grandchildren), holding the assets of the estate in a trust. Bypass Trusts allow the surviving spouse to use and access assets in the trust, but they are not the legal owner of the trust or the properties it contains.
Despite some clear benefits, Bypass Trusts also have some notable IRS-imposed limitations. Because the surviving spouse is never the official, legal owner of the trust and its assets, the surviving spouse is not required to include the trust property in his or her estate. This eliminates their need to pay estate taxes, making it not unlike the Marital Deduction Trust.
However, according to the IRS, a Bypass Trust may not exceed assets of $5,250,000. This amount is subject to change every year, which highlights the benefits and importance of a Marital Deduction Trust. Ultimately, the Marital Deduction Trust provides a more versatile, all-encompassing way for spouses to share assets and defer the need to pay federal estate taxes.
Talk with a Living Trust Attorney
Questions about the Marital Deduction Trust, the Bypass Trust, or other estate planning tools? Talk with Max Alavi APC, OC Trusts Lawyer. He has a wealth of estate planning experience helping clients develop their estate plans, and he boasts an incredible portfolio of rave reviews, plus a reputation for getting results on behalf of his clients. To learn more, schedule a consultation with Max Alavi APC, OC Trusts Lawyer, today.