One of the key goals of estate planning for individuals and couples is to reduce the tax burden on the estate as much as possible, allowing more of the assets to pass to heirs and beneficiaries. This is more difficult when an estate is large, but one of the tools used to protect the value of assets in such cases is known as a bypass trust. This type of trust utilizes different strategies to take advantage of several tax deductions, and when a couple uses it, both if their wills contain similar language.
Each will splits the jointly owned property into two shares, with one share capped at the applicable estate tax exclusion and the other share containing the remainder. The first share is treated as a standard life estate form and is left to the surviving spouse as well as the descendants. The second share is treated as an outright spousal gift and therefore qualifies for the marital deduction.
A bypass trust is not always the best approach, depending on certain details. For instance, if a large portion of the will is going to be passed on to adult children, it might not be appropriate. If the state estate tax is less pressing than the income tax, then portability rather than a bypass trust might end up being a more financially sound option. On the other hand, portability may take a long time and may not provide as much asset protection as a trust.
Each estate is different, and while a bypass trust is ideal for many large estates, it is not always the best solution. An estate planning lawyer can provide guidance and support during the process of writing a will as well as planning for the disbursement of an estate after death.
Source: Agri-view, "Should a bypass trust be used as estate planning tool?", September 05, 2014