Have you established a trust as way to transfer assets to your heirs and eliminate or at least reduce estate taxes? If so, there’s a good chance that you also have a By-Pass Trust in your will. But did you know that under the Economic Growth and Tax Relief Reconciliation Act of 2001, your By-Pass Trust might actually place a financial hardship on your surviving spouse?
By-Pass Trusts are used to double the amount of assets that you and your spouse can pass tax-free to the next generation. For instance the exemption amount is $1 million in 2002 and 2003. If you died in either of those years, that sum would be taken out of marital assets and placed into trust for your beneficiaries, and would not be readily available for your spouse. When your spouse dies, your $1 million would not be included in his or her estate, and he or she would pass along the same amount or more depending on the exemption at time of death. Hence at least $2 million escaped taxes.
Your will probably states that the amount of assets equal to the full exemption amount shall first be put into trust for beneficiaries other than your spouse. The logic was to keep those dollars and any growth on those dollars from becoming part of the unlimited martial deduction and thus part of your spouse’s estate. So far, so good.
But here’s the problem. Under the new law, the exemption gradually increases to $3.5 million by 2009. Therefore, depending on when you die, the total value of your estate could flow into the By-Pass Trust and leave your spouse with nothing. However, assets like retirement plans and life insurance, in which you have named your spouse as the beneficiary, would not be used to fund your By-Pass Trust. So they would be available for him or her.
The best thing you can do now is to review how your assets are owned, who is named as your beneficiary, and the language of your estate planning documents. Have you had your living trust reviewed in the last three years? If you would like a list of qualified estate-planning attorneys, return the enclosed coupon.