Very few people need to worry about federal estate taxes today with the threshold for taxation now at $11.58 million (in 2020) and surviving spouses permitted to add on the unused portion of their deceased spouse's credit through "portability." Yet many people have estate tax planning trusts put in place when the threshold was much lower and before portability was enacted. As recently as 2003, the threshold was $1 million and before 1998, it was just $600,000.
A so-called "bypass", "credit shelter" or "A/B" trust saves estate taxes by keeping some or all of the estate of the first spouse to pass away from being taxed as belonging to the surviving spouse when he or she dies. Continuing to keep trusts created back when the estate tax threshold was lower may create undue costs and restrictions for the surviving spouse, who otherwise could manage all of the couple's funds as her own. Bypass trusts can create more taxable capital gains when assets pass on to the next generation if there's significant appreciation in value between the deaths of the two spouses. In addition, some bypass trusts may cause unnecessary estate taxes upon the death of the first spouse to pass away.
That said, especially in Massachusetts, you might want to keep your bypass trusts. Here are some reasons why:
- The threshold for the Massachusetts estate tax is $1 million. Depending on the size of your estate, the use of bypass trusts can save up to $100,000 in estate taxes when the surviving spouse passes away.
- The funds in the bypass trust can be protected from the surviving spouse's creditors.
- They can be protected in the event the surviving spouse gets remarried or decides to disinherit one or more children. This is especially important in second marriages.
- The trust can protect the surviving spouse from scams and frauds perpetrated against elders.
- The trust will provide for management in the event of the incapacity of the surviving spouse.
In short, there's no one-size-fits-all answer as to whether you should keep, revise, or get rid of your old bypass trust. But make sure you review it with an experienced estate planning attorney to make sure it still makes sense for you today.
To learn more about bypass trusts and their potential drawbacks, read Beware: Your Estate May Contain an Unnecessary Bypass Trust.