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Under the estate tax rules in effect a few years ago, any unused exemption of the first spouse to die went out the window, and the surviving spouse was left with only his or her single exemption. Therefore, if the first spouse to die simply left everything to the surviving spouse, that person could wind up with a taxable estate well in excess of the estate tax exemption. When the surviving spouse died, a federal estate tax bill would fall due.

To prevent this unfortunate outcome, the estate planning documents of many married couples include language that establishes a so-called bypass trust (also called a credit shelter trust) when the first spouse dies. Under the bypass trust arrangement, some or all of the assets of the first spouse to die go into the bypass trust. Usually, the couple’s children are the remainder beneficiaries of the bypass trust after the surviving spouse’s death, and the surviving spouse can dip into the bypass trust’s assets as necessary to meet his or her legitimate financial needs during his or her lifetime.

For federal estate tax purposes, the amount that goes into the bypass trust is included in the deceased spouse’s estate where it is sheltered by that person’s federal estate tax exemption. When the surviving spouse dies, the assets in the bypass trust are not considered part of that person’s estate, and the surviving spouse’s assets can be sheltered by his or her federal estate tax exemption. When all was said and done, the bypass trust arrangement allowed the federal estate tax exemptions of both spouses to be used without depriving the surviving spouse from necessary access to the deceased spouse’s assets.

Thanks to the current portable federal estate tax exemption rule, married couples with joint estates worth up to $22.36 million in 2018 can now take advantage of both spouse’s federal estate tax exemptions without bypass trust arrangements. The unused exemption of the deceased spouse can be used by the surviving spouse upon that spouse’s death in addition to his or her own exemption amount. Therefore, if your existing estate planning documents include now-unneeded bypass trust language, you may want to add a clause that deactivates that language. The new clause should also direct the executor of your estate to pass along any unused federal estate tax exemption to your surviving spouse.

Key Points: A bypass trust arrangement can still be useful if you want to leave assets to your children without totally depriving your surviving spouse of access to those assets in the event of legitimate financial need. Also, a bypass trust may offer protection from creditors. Just make sure your bypass trust language is updated to reflect the $11.18 million federal estate tax exemption for 2018. Otherwise, depending on how your bypass trust language reads, you could wind up leaving more than you intended to your kids and less than you intended to your surviving spouse — or vice versa.


Excerpts from an article in the EHTC e-newsletter, May 30, 2018.

If you have an old estate plan and would like to simplify due to the new increased exemption amount, please give me a call. I would be happy to assist you.

If you have any questions on estate planning, please call Karen L. Stewart, Attorney and Counselor at (248) 735-0900.

For more information, please see my website, www.customestateplans.com