A comprehensive Oklahoma estate plan may include bypass trusts, especially in high-asset families, because they may mitigate the taxes faced by an estate after a benefactors dies. A bypass trust strategy may be effective, but its advantages may be limited due to the portability of estate tax exemptions and other factors.
The strategy involves the spouses drawing reciprocal wills after balancing the value of their holdings. Each of the wills divides the associated individual's estate into two parts; the first share goes to the surviving spouse as a life estate up to an amount dictated by the federal estate tax exclusion. In 2014, the exclusion was $5.34 million. Any remainder of the first share goes to other chosen beneficiaries. The second share is left to the surviving spouse without the restrictions of a life estate, and it should qualify for the marital deduction.
The result is that first spouse's estate tax is zeroed out and the surviving spouse's estate tax liability is minimized when he or she later dies. It can be an effective strategy, but some of its advantages may be obviated by the portability of the estate tax exemption.
If the combined wealth of the spouses does not exceed their combined exemptions, which equals $10.68 million in 2014, a bypass trust may not be necessary. This is especially true in situations where the spouses intend to leave their assets to their children and live in a state that does not impose estate or inheritance taxes.
Beyond the potential tax advantages, bypass trusts may be useful as a means of asset protection. An estate planning attorney may be able to help interested parties understand the potential benefits and limitations of a bypass trust given their particular circumstances. In the event that a bypass trust is not the appropriate instrument, an attorney may be able to suggest tax planning alternatives to protect the value of an estate.
Source: Agri-view, "Should a bypass trust be used as estate planning tool?", September 11, 2014