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Reports of the Death of the Bypass Trust Are Greatly Exaggerated 

I’m curious: Did you create your estate plan before 2011? Does it include a bypass trust, aka family, credit shelter or B trust? If so, then you should be aware that changes in estate taxes may affect you and that you and your attorney should take a fresh look at your estate plan. This is especially important if your net worth is less than $6 million.

A bypass trust, which generally allows for assets to pass to the next generation without being subject to the federal estate tax, used to be a popular tax saving device for couples with combined assets that approached or exceeded the estate tax exemption. But in recent years the law has changed in two significant ways that impact the decision whether your estate plan should include a bypass trust. First, in 2011, the personal estate tax exemption, which in 2009 was only $3.5 million, increased to $5 million. Now indexed for inflation, it currently stands at $5.45 million for each individual. Thus, many couples who at one time were subject to federal estate taxes and needed a bypass trust may no longer need one.

Second, “portability” was introduced in 2011. This allows for the unused portion of a deceased spouse’s estate tax exemption to pass to the surviving spouse. As a result, bypass trusts are not needed to preserve the individual tax exemptions. The practical effect of these changes is that a married couple may be able to shield almost $11 million from federal estate taxes without a bypass trust.

Contrary to what some published sources indicate, however, bypass trusts are not dead. They are less important than they used to be for smaller estates. They do, however, continue to be an important estate planning tool for many estates, particularly for those where the combined net worth approaches or exceeds $11 million.

For couples whose net worth is in the $6 million to $10 million range, I look at a variety of factors to determine whether to use a bypass trust. These include the age of my clients, how likely one of them is to remarry, and the volatility of the assets they own. As a general rule, the younger a couple is and the more volatile their assets, the more likely it is that their net worth might grow to exceed the exemption amount. In this situation, I am more likely to consider using a bypass trust as part of their estate plan.

Bypass trusts commonly featured in a high percentage of estate plans. If you haven’t had your estate plan reviewed since 2011, there is a good chance that your estate plan contains a bypass trust. You should therefore have a competent attorney determine whether the use of the bypass trust is still warranted, or whether you can protect your assets, minimize tax exposure, and carry out your other business and personal goals in some other way.

By Kevin J. Moore