People generally have good intentions when they develop their estate plans. They want their loved ones to be cared for and their wishes carried out in the simplest way possible without unnecessarily burdening others. However, there are some obstacles that come up which can be difficult to anticipate.
For example, many people may have heard about bypass trusts. These trusts were very common ways of designating two recipients of a trust by setting aside some money in a trust for a surviving spouse while the rest of the assets passed on to a secondary party, quite often a couple’s children. The second party would receive the assets in a trust after the death of the remaining spouse. Bypass trusts were often considered effective ways of avoiding estate taxes. However, now that the estate tax exemption limit is much higher, bypass trusts may not be as effective as they once were.
With the changes in estate tax exemption limits, bypass trusts may not be the most effective solution for people. This is because the assets in a trust that eventually would pass on to the kids can be subject to taxes on capital gains. In some cases, these taxes can be much higher than people expect.
But there are ways to reassign ownership of the assets in a trust in such a way that these capital gains taxes can be minimized while still avoiding estate taxes. It can require legal strategies that people may not be familiar with and cooperation from beneficiaries, but it is certainly possible. And in the long run, everyone can benefit from adjusting the terms and accessibility of a trust.
No matter how deliberate and effective the terms of an estate plan are at the time a plan is drafted, it is impossible to predict what changes will ultimately affect the execution of these wishes years later. The administration of a trust is an ongoing effort, and the terms of a trust may have to be revisited and explored over time to ensure that the intent of the trust’s creator is being respected.
Source: The Wall Street Journal, “Avoiding a Tax Hit From a Bypass Trust,” Austin Kilham, Sept. 5, 2013