What You Need to Know About Terminating a Bypass Trust

As tax laws have evolved over the years, some tools of estate planning have become outdated. What was once beneficial to a surviving spouse may no longer be the best option. A bypass trust, combined with a survivor’s trust to form what’s known as an AB trust, is often used by affluent couples as a means of avoiding high estate taxes. Thanks to modern tax laws, this complicated method of estate planning may not be necessary.

Under an AB trust, each spouse could utilize the exemption equivalent amount from federal estate taxes. Upon the death of the first spouse, the assets would be split so that their portion of the couple’s property would go into the bypass trust while the surviving spouse’s portion would go into the survivor’s trust.(link to http://www.drobnylaw.com/articles/terminating-a-deceased-spouses-bypass-trust/) This was a more sensible solution when each couple was only allowed a $600,000 exemption as was the case up until the 1980s. Between 1981 and 2011, the amount of the exemption gradually increased from $600,000 to $5 million with some fluctuation in between. As of 2019, the amount for each spouse is over $11 million. Additionally, the American Tax Relief Act of 2012 introduced portability meaning that the exemption amount allowed for the first spouse upon their death would be portable to the surviving spouse.

So what are your options if you have a bypass trust and it’s no longer the best option for you and your family? (link to https://www.calcpa.org/news/2018/02/22/bypassing-the-bypass-trust) If both spouses are still alive, your estate planning attorney can review your current plan and assist with making whatever changes or amendments are best suited to your needs. If one spouse has already passed away, there are still ways of getting around the bypass trust. (link to https://www.forbes.com/sites/ashleaebeling/2013/06/05/how-to-kill-an-irrevocable-trust/#1bd837911b1c) If the value of the estate is lower than a certain amount or the costs of maintaining it are too high, a trustee or beneficiary can petition the court to terminate the trust. Depending upon just how high the value is, it may be possible to “spend down” some of the assets. Keep in mind that, in some states, the exemption amount allowed by state law may be lower than the federal amount. Your attorney can help you determine if there would be any benefits to keeping the trust in place.

For some couples, a bypass trust may still be helpful when it comes to avoiding estate taxes, particularly if the assets are much greater than the exemption amounts. Consult with an estate planning attorney to find out if your estate plan includes a bypass trust or to determine if you still need one.