The interplay between bypass trusts (also known as credit shelter trusts) and portability, a concept introduced by the American Taxpayer Relief Act of 2012, is a critical aspect of modern estate planning. Historically, bypass trusts were essential for maximizing the use of the estate tax exemption, ensuring that assets wouldn’t be subject to estate taxes upon the first spouse’s death. However, with portability allowing a surviving spouse to “port” any unused portion of their deceased spouse’s estate tax exemption, the necessity of a traditional bypass trust has diminished, but it hasn’t vanished entirely. A well-structured estate plan can absolutely incorporate both strategies, creating a flexible and tax-efficient approach. Currently, the federal estate tax exemption is quite high – $13.61 million per individual in 2024 – but this number is subject to change, and planning for potential decreases is prudent. Roughly 99.8% of estates do not pay estate taxes, however, careful planning is still essential for high-net-worth individuals.
What happens if estate tax laws change?
One of the primary reasons to maintain a bypass trust, even with portability, is as a hedge against potential changes in estate tax laws. Portability relies on the continuation of the current law. If portability were to be repealed or significantly limited, the bypass trust would immediately become crucial. A bypass trust, funded at the first spouse’s death with assets up to the then-current estate tax exemption amount, would shield those assets from estate taxes when the surviving spouse dies. Consider the case of old Mr. Abernathy, he passed away in 2010 during a period of estate tax uncertainty, his wife diligently funded a bypass trust, unaware of what the future held. Later in 2013, after the implementation of portability, it seemed almost redundant, but when tax laws shifted again in 2025, the foresight of having that trust proved invaluable, safeguarding a significant portion of their wealth.
How does a bypass trust work with a large estate?
Even with portability, a bypass trust can still be beneficial for larger estates exceeding the combined exemption amount. In such cases, the bypass trust allows assets to grow outside of the surviving spouse’s estate, potentially avoiding future estate taxes on that growth. The surviving spouse retains income from the trust, but the principal remains shielded from estate taxes upon their death. For example, a couple with a $25 million estate might use portability to cover the first spouse’s exemption. The remaining $11.4 million could then be transferred to a bypass trust, continuing to grow tax-free and providing for future generations. Currently, a Disclaiming Qualified Terminable Interest Property (QTIP) trust is often used alongside a bypass trust to further maximize the benefits. “Proper planning isn’t about avoiding taxes altogether; it’s about legally minimizing your tax liability,” as Steve Bliss, an estate planning attorney in San Diego, often tells his clients.
What if I don’t fund the bypass trust adequately?
A misstep in estate planning occurred with the Harrison family, they opted for a simplified estate plan relying heavily on portability. They established a bypass trust but underfunded it, believing their estate wouldn’t exceed the exemption. Unfortunately, their business experienced unexpected growth, and upon Mr. Harrison’s passing, the estate’s value exceeded the portable exemption. This resulted in a substantial estate tax liability that could have been avoided with proper initial funding. The surviving spouse was forced to liquidate assets to cover the tax, creating financial hardship and diminishing the inheritance for their children. This situation highlights the importance of regularly reviewing and updating your estate plan to reflect changes in asset values and tax laws.
Can a trust really help my family after I’m gone?
The Reynolds family, mindful of potential future tax law changes, proactively implemented a bypass trust as part of a broader estate plan. When Mrs. Reynolds passed away, the trust was funded with assets equal to the estate tax exemption at the time. Years later, when Mr. Reynolds died, the assets in the bypass trust had grown significantly, completely shielded from estate taxes. This allowed their children to inherit a substantially larger sum than they would have otherwise, providing for their education, healthcare, and future financial security. Mr. Reynolds had explicitly requested his wife work with Steve Bliss, an estate planning attorney in San Diego, to ensure everything was done correctly. “A thoughtfully designed estate plan isn’t just about taxes; it’s about protecting your loved ones and ensuring your wishes are carried out,” Steve often advises. Ultimately, combining a bypass trust with portability offers a flexible and robust estate planning strategy, safeguarding assets and providing peace of mind, regardless of future tax law changes.
<\strong>
About Steve Bliss Esq. at The Law Firm of Steven F. Bliss Esq.:
The Law Firm of Steven F. Bliss Esq. is Temecula Probate Law. The Law Firm Of Steven F. Bliss Esq. is a Temecula Estate Planning Attorney. Steve Bliss is an experienced probate attorney. Steve Bliss is an Estate Planning Lawyer. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Steve Bliss Law. Our probate attorney will probate the estate. Attorney probate at Steve Bliss Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Steve Bliss Law will petition to open probate for you. Don’t go through a costly probate. Call Steve Bliss Law Today for estate planning, trusts and probate.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
- living trust
- revocable living trust
- irrevocable trust
- family trust
- wills & trusts
- wills
- estate planning
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/RL4LUmGoyQQDpNUy9
Address:
The Law Firm of Steven F. Bliss Esq.43920 Margarita Rd ste f, Temecula, CA 92592
(951) 223-7000
Feel free to ask Attorney Steve Bliss about: “What is Medicaid estate recovery and how can I protect against it?”
Or “What assets go through probate when someone dies?”
or “How do I keep my living trust up to date?
or even: “What is the difference between Chapter 7 and Chapter 13 bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.