Bypass Trusts with Richard J. Lee Law Group

If you had a trust prepared prior to 2012, you should consider having it reviewed and potentially updated. This is because the law has changed and your estate plan may need to be updated to reflect the current law for the most efficient administration. Most estate plans created prior to 2012 contained a bypass trust that requires the trust estate to be divided into two or more subtrusts after the death of the first spouse. The purpose of the bypass was to minimize estate taxes by effectively doubling the size of the estate that is not subject to the estate tax. Due to changes in the law, this division is generally not necessary.

The changes in the law are: First, Congress created the concept of portability, which allows the surviving spouse to use the unused estate tax exemption of the deceased spouse. Prior to portability, assets needed to be put into the bypass in order to use the deceased spouse’s estate tax exemption.

Second, the exemption amount has greatly increased. In 2000 the estate tax exemption was $1 million dollars per person. This means that if spouses had a trust with a bypass, they would be able to give up to $2 million dollars to their beneficiaries without having to pay an estate tax. Today the estate tax exemption is $13.99 million per person. This means that unless your and your spouse’s estate is worth almost $28 million, your heirs will not have to pay an estate tax. The exemption per person is set to increase to $15 million per person on January 1st, 2026, and will be adjusted yearly to account for inflation.

A bypass under current law is not only unnecessary, but also burdensome for the surviving spouse because a bypass requires a separation of your property into two or more parts. A tax return for at least one of the subtrusts must be filed every year for the life of the survivor. Also, if property is sold, the proceeds need to be divided into separate accounts for the bypass.

Furthermore, the property in the bypass trust will also not get a stepped-up basis on the date of the surviving spouse’s death, which may lead to additional capital gains taxes if the property is sold by your heirs. This can be avoided if the trust is amended during both spouses’ lifetime to remove the requirement of the bypass trust. Any property will then get the stepped-up basis and will reduce the amount of capital gains taxes needed to be paid on the sale of said property.

I have had several clients come to me after their spouse has died who have found the two trusts to be burdensome and costly. In order to make any changes to the trust to reflect the current law, either a court proceeding is required, or all of the beneficiaries agree to the change. This is possible to do but costs additional money and time. It is much easier to fix the documents while both spouses are alive.