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Create a Revocable Trust to Help You Achieve your Estate Planning Goals

The website reminds us in “When to amend your revocable trust,” that we spend a lifetime saving and accumulating assets, so it’s important to have a well-conceived plan for how our wealth will be transferred to others after we pass away.

If your estate plan includes a revocable living trust, start by examining the provisions for potential revisions. First, look at who was named as successor trustee and make certain that he or she is still willing and able to serve in that role when called upon. Also, terms governing how assets in the trust are to be distributed after your death should be reviewed carefully to make sure the named beneficiaries and amounts they are to receive from the trust are still as you would like.

Providing for your spouse is typically an estate planning goal for couples, as well as ensuring that property is transferred with the least amount of loss from estate taxes. You can do this by adding a “credit shelter” or “bypass” provision to revocable trust documents.

Federal estate and gift tax rules state that spouses can pass an unlimited amount of property to each other without incurring gift or estate tax. Each spouse is also given a specific exemption amount to shelter property from tax liability when passed to others at their death.

When the first spouse dies, estate tax can be avoided by leaving all property to the surviving spouse. At the survivor’s death, the estate tax will be due to the extent that the couple’s remaining assets exceed the federal estate tax exemption.

However, the problem with leaving all property outright to a surviving spouse is that the first spouse can’t use his or her estate tax exemption. It would be wiser to include a bypass provision in the trust that transfers an amount equal to the federal estate tax exemption amount to a separate trust—with the remainder going directly to the survivor.

The bypass trust can provide income to your survivor spouse and can make additional distributions for his or her health, support, education, or maintenance. However, the trust can’t give him or her unlimited access to the funds. This way, the bypass trust’s assets will not be a part of the surviving spouse’s estate and subject to the estate tax. Taxes are minimized by the bypass trust because both spouse’s estate tax exemptions are fully utilized.

Bypass trusts were an effective planning tool when the federal estate tax exemption was just $1 million, but in 2012, Congress upped the exemption amount and portability of the exemption between spouses. In 2016, the estate tax exemption amount is $5.45 million. As a result, bypass trusts may no longer be needed to avoid federal estate tax.

However, there may still be good reasons to keep the bypass trust language, including protecting the trust’s assets against creditor claims, preserving assets for minor children, or having the ability to make larger gifts to children without gift tax consequences. If you live in or move to a state with its own estate tax, a bypass provision may still be a good idea so that the tax liability is minimized.

Reference: (January 17, 2016) “When to amend your revocable trust”

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