Creating an estate plan is one of the best ways to manage and protect your wealth. Estate planning simply refers to the arrangement an entity makes. At the same time, he is still alive to manage and distribute their property or assets during the entity’s lifetime or after their death. In short, the sole purpose of an estate plan is to represent your interests, whether you are dead or alive. Going by this explanation, it should come as a surprise to no one when we say that the importance of creating a good estate plan can never be overstated.
The assets included in a typical estate plan can be real properties such as houses, lands, commercial buildings, etc. The assets can also be cars, shares, banks, and personal properties. It can as well be one’s intellectual property.
However, it should be noted that in creating an estate plan, a bypass trust could be of great help. But then again, how bypassing trust will help your cause depends mostly on your financial goals.
Understanding what a bypass trust means and its benefits will help you plan your finances and ensure that you know what is right for your financial plan.
Therefore, in this article, we will explain what bypass trust means and the benefits and downsides of a bypass trust. So, without any delay, let’s get on with it.
What Exactly Is a Bypass Trust?
A bypass trust, which can also be referred to as an AB or credit shelter trust, is an estate planning tool used or legally arranged by couples to maximize or eliminate their federal estate tax. That is, it helps couples maximize or eliminate the federal estate tax, particularly when one of the spouses dies.
In the United States, bypass trusts as an estate planning tool are becoming increasingly popular now because they help to avoid gift tax and, most importantly, limit the taxation of assets after a married spouse passes away.
A bypass trust is called AB trust because it involves the establishment of two trusts called “A” trust, which can also be called a marital trust, and “B” trust, otherwise known as a bypass or family trust. Now, when one spouse passes away, the estate’s assets will then be split into survivor trusts (A trusts) and bypass/family trusts (B trusts)
What Differentiates a Bypass Trust From a Survivor Trust?
There is a clear difference between the two types of trusts. In a bypass trust, for example, the property in this type of trust doesn’t belong or go to the surviving spouse. However, as long as the surviving spouse is still alive, he can still use the property and receive income from it.
Also, the property will not be subjected to any federal estate taxation as long as the value of the property is below the federal estate tax exemption, which is currently set at $12.06 million. However, just because the property is not subjected to any federal estate tax doesn’t mean it won’t be subjected to state estate tax.
The Survivor trust, or Martial Trust, on the other hand, is different from the bypass trust. In this type of trust, all the property will go straight to the surviving spouse. which they will have full control over the property. They can use it, spend it, give it away, or even leave it to the final beneficiaries you specify (usually the children). It should, however, be noted that in this type of trust, no federal or state estate tax is due on this property.
The Importance of a Bypass Trust
A bypass trust comes with many perks. For instance, a Bypass Trust Will Help Minimize Or Even Eliminate Federal and State Estate Tax. This is arguably the most important benefit of a Bypass Trust. Since estate taxes are assessed against the assets of an estate after all debts have been paid, it will help eliminate both state and federal estate taxes. However, depending on the type of trust, some states in the United States of America still place estate taxes on some properties.
It also helps to avoid probate. Another reason many married couples set up a bypass trust is to avoid probate. The reason is that irrespective of your state of residency, probate usually takes up to 6 months or a whole year before it’s completed.
Some Drawbacks of Bypassing Trust
The bypass trust also has some disadvantages. To start with, a bypass trust can sometimes be very expensive. Plus, it can be time-consuming. This is because, in the process of establishing a bypass trust, you will be required to hire an estate planning attorney to assist you in the whole process. And since hiring an attorney doesn’t usually come cheap and easy, you must be prepared financially and emotionally.
Also, the bypass trust system often requires periodic maintenance of the trust by the surviving spouse. The spouse will be responsible for maintaining the trust and overseeing all the assets included in the trust. This can sometimes be challenging, particularly if the surviving spouse doesn’t have the strength and time to oversee all these. However, a simple solution would be to hire a trustee to maintain the trust. But then again, this will incur additional costs.
Conclusion
Contrary to what many people think, estate tax law is not the most complicated as long as you have a sizeable estate and understand your options and the entire process. However, to make the journey even less stressful, it would be advisable to hire a Saanichton Law Group attorney to assist you.
