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Berge & Berge, LLP Blog

Tuesday, August 14, 2018

What is a Tax By-Pass Trust?

Using a By-Pass or A/B Trust was a popular way of avoiding estate taxes by couples that had a high-value estate. With the recent changes to the tax code, many couples no longer need to worry about avoiding federal estate taxes. Therefore, the use of Tax By-Pass Trusts may not be as common in estate planning moving forward. However, for some couples, an A/B Trust may still provide some benefits that outweigh any disadvantages of using a Tax By-Pass Trust.

You should consult with an experienced California trusts and estate planning lawyer to discuss the pros and cons of Tax By-Pass Trusts. You may have several other estate planning options that satisfy your needs and goals in a more efficient manner.

What is a Tax By-Pass Trust?

A Tax By-Pass Trust or A/B Trust is used to transfer property in a way that avoids paying estate taxes multiple times. The trust is created when the first spouse passes away. An amount equal to the estate tax exemption is placed in a Bypass Trust with the remaining assets being placed in a Spousal or Marital Trust. The spouse receives the income from the Bypass Trust during his or her lifetime.

Upon the death of the surviving spouse, the principal assets in both trusts plus the surviving spouse’s personal assets are transferred to the future beneficiaries who are usually the couple’s children. The assets in the Bypass Trust are not taxable while the assets from the surviving spouse’s trust and estate enjoy the current estate tax exemption.

However, there could be disadvantages of using a Tax By-Pass Trust. A California trusts and estate planning lawyer can help you determine if you need this type of trust now that the tax code has changed. In addition, other estate planning tools may accomplish the same goals without the time, cost, and effort of implementing and operating an A/B Trust.

Is There A Reason to Continue Using a Tax By-Pass Trust?

Because of changes in the tax laws, a married couple may no longer need a Tax By-Pass Trust to reduce or eliminate estate taxes. However, these types of trust can be useful in other situations. For example, an A/B Trust can be used in blended families to protect property that is intended for the beneficiary’s children.

With an A/B Trust, a spouse can split the assets into a Family Trust and a Survivor’s Trust. The spouse may receive income from the Family Trust during his or her lifetime. However, upon the death of the surviving spouse, the assets within the Family Trust are distributed to the first spouse’s children. By using the A/B Trust, the question of whether a new stepparent or step-sibling will receive these assets is moot.

California Trusts and Estate Planning Lawyers You Can Trust

There could be other situations in which a Tax By-Pass Trust could be beneficial in estate planning. As with any trust, we strongly urge you to consult with the California trusts and estate planning lawyers at the Law Offices of Berge & Berge to discuss all the available options before determining whether to use a trust as part of your estate plan. You want to ensure the trusts you are using as part of your estate plan provide the best benefits for you and your family.


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