October 2003
Estate Planning: Consider A Bypass Trust

Although you may have heard that the federal estate tax was repealed by recent tax legislation, and wondered whether there is even a need for estate planning any longer, in reality those changes to the tax laws fully repealed the estate tax for just one year, 2010! After 2010, depending on what Congress may decide to do (based on the federal budget and/or prevailing political climate), the law provides for current estate tax rules, rates and exemptions to be reinstated in 2011. In other words, the estate tax lives on, albeit with a slowly rising exemption and a slight drop in rates through 2009.

Phase-Out Schedule

The phase-out of the federal estate tax is following a slow timetable: In 2002, the top estate tax rate was reduced to 50% and the exemption increased to $1 million. The tax rate decreases by one percent each year through 2007 and then stays at 45% until 2010. The exemption, meanwhile, will increase to $1.5 million next year (2004), then to $2 million in 2006 and, finally, $3.5 million in 2009. Generation-skipping taxes will be tied to the highest estate tax rate throughout the 10-year phase-out.

The Bypass Trust

Every individual is provided by law with an estate tax credit to protect assets from federal gift and death taxes. One spouse may transfer an unlimited amount of property to the other spouse free of any gift or death taxes. Should transfer occur by reason of death, the death tax will be deferred through this unlimited marital deduction, although assets received by the surviving spouse will be subject to tax at his or her later death (protected only to the extent the second spouse's estate is less than the prevailing exemption). In other words, it is not always advantageous for a married couple to plan their estates for outright transfer to the survivor at the death of the first spouse, since the combined assets may be heavily taxed later in the survivor's estate at death. In many instances, it is advisable to plan for a bypass trust to receive assets equal to all or part of the available exemption amount at death of the first spouse. Assets can pour into an irrevocable bypass trust for the survivor's benefit. The value of the bypass trust is not included in the taxable estate of the surviving spouse, so the federal death tax is avoided (i.e., bypassed) on these assets and not merely deferred for later taxation.

Set forth below are examples of death tax savings achieved with a bypass trust & the current, available $1 million exemption:

Careful estate planning now can ensure that you preserve as much wealth as possible for your family. We would be pleased to assist you in separating the opportunities from the pitfalls in planning your estate in light of Congress' frequent changes to the tax laws. If you have questions, please call a member of our Estate Planning Group: Alan Shovers, Brian Williams, John Hegeman, Mark Samila, Allison Comstock, Amy Steinhart or Beth Browning.