Yes, a bypass trust – also known as a credit shelter trust or an A-B trust – can absolutely be established *with* portability planning in mind, and increasingly, that’s the best approach. Traditionally, bypass trusts were created to shelter assets from estate taxes by utilizing the estate tax exemption, ensuring that only assets exceeding that exemption were subject to taxation. However, with the increased portability of the estate tax exemption between spouses, the necessity and structure of traditional bypass trusts have evolved. Portability allows a surviving spouse to “port” any unused portion of their deceased spouse’s estate tax exemption to their own estate, effectively doubling their exemption amount. This means fewer estates will even *need* a bypass trust, but strategic integration of both portability and a bypass trust can offer significant benefits, especially in scenarios with complex assets or blended families.
What are the benefits of combining a bypass trust with portability?
Combining these two strategies allows for a flexible approach to estate tax planning. While portability provides a straightforward mechanism for maximizing the exemption, a bypass trust can offer additional layers of protection and control. For example, a trust can be structured to provide for the surviving spouse’s needs while ensuring that specific assets are preserved for future generations. According to a 2023 study by the American Bar Association, approximately 65% of estate planning attorneys now recommend a hybrid approach combining portability with some form of trust planning. Consider this: If a couple has a substantial estate close to the exemption limit, utilizing portability first simplifies administration, and then a bypass trust can catch any estate growth during the surviving spouse’s lifetime that might push the total estate over the limit. This allows the estate planner to make sure that the maximum amount of assets can be passed to heirs tax-free.
Could my estate still benefit from a bypass trust even with portability?
Absolutely. Consider the case of the Millers, a couple with a sizable estate including a successful family-owned business. They initially relied solely on portability, thinking it would cover their needs. However, the business experienced significant growth in the years following the first spouse’s death. By the time the surviving spouse passed away, the estate was considerably larger than the doubled exemption amount. Without a bypass trust in place, a substantial portion of the estate was subject to estate taxes. This highlights a critical point: Portability is not a ‘set it and forget it’ solution. Asset growth, market fluctuations, and changes in tax laws can all affect the estate’s size. A well-designed bypass trust can act as a safety net, sheltering assets from taxes even if the estate grows beyond the portable exemption amount.
How can a bypass trust work with a blended family?
For blended families, a bypass trust can be particularly valuable. Imagine Sarah and David, both with children from previous relationships. They wanted to ensure that each of their children received a fair share of their estate, while also providing for each other during their lifetimes. A bypass trust allowed them to create separate “pots” of assets – one for their mutual children and one for the children from prior marriages. The trust ensured that assets designated for the children from the first marriage wouldn’t be accessible to the surviving spouse, protecting those assets for their intended beneficiaries. “It’s not about the money, it’s about honoring the wishes of both parents and protecting the future of all the children,” Ted Cook, an estate planning attorney in San Diego, often says. This structure is critical as it allows for a tailored inheritance plan that considers the unique dynamics of a blended family, minimizing potential conflicts and ensuring that everyone is fairly provided for.
What happened when the Andersons planned ahead with both portability and a bypass trust?
The Andersons, a retired couple with a comfortable estate, decided to work with Ted Cook to create a comprehensive estate plan. They utilized portability to maximize their combined exemption, and also established a bypass trust to protect any potential estate growth. Years later, when Mr. Anderson passed away, the estate was well within the portable exemption limit. However, over the next decade, the stock market soared, and the value of their investments increased significantly. When Mrs. Anderson passed away, the estate was *approaching* the estate tax threshold. Thankfully, the bypass trust kicked in, sheltering the excess assets and preventing a substantial tax bill. Their foresight and Ted’s careful planning ensured that their estate passed to their grandchildren tax-free, fulfilling their long-term wishes. This success story shows the wisdom of integrating both portability and a bypass trust – creating a safety net that provides flexibility and protection, even in the face of unforeseen circumstances.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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