I have seen a number of clients in the last twelve months who have provisions for a “bypass trust” in their current estate plans. In the usual scenario for plans in the past, a bypass trust is created and funded when the first spouse of a couple dies. Some (perhaps all) of that spouse’s property is put into the bypass trust for the benefit of the surviving spouse. When the surviving spouse dies, that property is distributed to the final beneficiaries (often the couple’s children).
Estate planners drafted for bypass trusts in the past because it was a way of reducing estate taxes. If someone died in the year 2000, for example, an estate worth over $ 675,000 would be taxable. By putting property into a bypass trust, the first $ 675,000 of assets would “bypass” the surviving spouse and not be in her estate, even though she would be the lifetime beneficiary of that trust. When she died, her estate was smaller by $ 675,000 (and any appreciation on those assets), which resulted in substantial savings on estate taxes.
In 2015, however, an estate is taxable only when it exceeds $ 5,430,000. Most peoples’ estates will not be so large, so there is a lot less incentive to draft for a bypass trust.