Tax Cuts and Jobs Act; Part I: Do you still need a Bypass Trust?

As I’m sure most of you have heard, a new tax bill was signed into law at the end of 2017. There are numerous changes which I’ll touch on in the coming months. As always, this column does not constitute tax advise; consult your tax preparer about your particular situation.

Of note to estate planners was the increase in the exemption amount to $11 million dollars, a doubling of the amount an individual can leave estate-tax free (22 million dollars for a married couple). Before the change many estates already were not subject to an estate tax; obviously now even fewer estates will be taxable (there is no California estate tax). How does that impact your estate plan?

In the past married couples would sometimes choose an “AB” or an “ABC” trust in order to segregate the first to-die spouse’s assets in an irrevocable trust, often called a Bypass trust. This prevented the bypass trust assets from being taxed in the estate of the second spouse to die. Of course, for couples whose total estate was less than the amount one person could leave estate-tax free, this was not an issue. [Also the introduction of “Portability” in 2013 allowed a surviving spouse to “port” over a deceased spouse’s unused exemption without the use of a separate trust at all.]

Do we still need trusts at all (yes!) and do we still need to split out a share of the estate at the first death into a bypass trust (well, it depends). You may want your share of the estate put in an irrevocable trust in order to preserve assets for children or others. In this way you can exercise some control over your assets after death. Do you want your surviving spouse to have some use of the assets, but then the remaining assets pass to your children (or a charity) at that spouse’s death?

What if you and your spouse have a revocable trust but it can no longer be amended, either because your spouse has passed on or no longer has capacity to sign an amendment. We can file a petition with the probate court requesting the modification of an irrevocable trust with the consent of all beneficiaries (this won’t work if all the beneficiaries do not consent). There are other grounds to modify an irrevocable trust: I’ll cover more in my next post (with more tax news).

Happy New Year Everyone! And call me if you are thinking of switching to a simpler trust or considering a petition to modify an irrevocable trust.