Max Alavi, Attorney at Law, APC has 6 locations in Orange County and Los Angeles County, California
Marital Deduction Trusts allow a surviving spouse to defer federal estate taxes while enjoying the use and benefits of trust property.
The federal estate tax marital deduction is one of the most important tools available to a married couple as the couple plans their estate. The deduction allows a married couple to leave all or a portion of one spouse’s estate to the surviving spouse without having to pay an estate tax. However, the deduction acts as a postponement of the estate tax until the second spouse dies, not a reduction in the overall tax itself.
Estate planning attorneys will often draft a Marital Deduction Trust in order to combat the negative effects that the passing of an estate can have on a married couple, including access to assets and payment of estate taxes. A Marital Deduction Trust allows a surviving spouse the legal right to use the property and assets left in the trust as well as defer the payment of federal estate tax until after both spouses have died. Once both spouses have died, whatever is left in the trust is passed to the spouses’ determined beneficiaries.
Bypass Trusts can give a surviving spouse access to trust property without the hassle and taxes associated with actual ownership.
Married couples can also take advantage of what is called a Bypass Trust in order to protect property and assets from federal estate taxes. A Bypass Trust is designed to essentially bypass the surviving spouse in favor of children, grandchildren or whomever the property is held in trust. With a Bypass Trust a surviving spouse will still have the legal right to use and benefit from the property and assets in the trust, but he or she will not be the legal owner of the trust property.
A Bypass Trust has many benefits to those wishing to use the trust, but it also carries many IRS-imposed restrictions. A Bypass Trust allows a surviving spouse the legal right of access and use of the property left in the trust once the first spouse has passed away. Because the trust property bypasses the surviving spouse and is left to a determined beneficiary(s), the surviving spouse never takes legal possession of the trust property and thus is never considered an owner of the property. Therefore, the surviving spouse does not have to include the trust property in his or her estate and can eliminate estate taxes paid by the surviving spouse on that property.
As of 2013, pursuant to IRS regulations, a Bypass Trust may not exceed assets totaling more than $5,250,000. This means that if marital assets total more than this amount, they will have to be dealt with in another manner. Generally, the remaining assets will be left to the surviving spouse subject to the marital deduction or applicable federal estate taxes. Because this $5.25 million figure is subject to change every year, it highlights the benefits and importance of a Marital Deduction Trust. A Marital Deduction Trust can encompass ALL property and assets owned by a married couple while a Bypass Trust has an ever-changing, but defined, limit.
A married couple should consult a qualified and experienced estate planning attorney to determine whether a Marital Deduction Trust and/or a Bypass Trust are appropriate for them. The attorneys at Alavi & Broyles can answer any questions a couple may have regarding these complex areas of estate planning and can provide guidance and assistance to a couple in determining, organizing and executing the best possible plan for their estate.
Max Alavi focuses on assisting clients establish effective and secure vehicles for passing their assets to their loved ones and protecting their families from the uncertainty and expense associated with probate and testamentary guardianship matters. He is also dedicates a significant portion of his practice to complex probate matters, trust administration and litigation of contested trusts.