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Should you set up a bypass trust?

On Behalf of | Oct 24, 2022 | Probate and Trust Administration

Oklahoma residents with significant wealth prepare estate plans to ensure that their assets will be correctly managed and distributed after death. Worried couples often express concern about how to ensure that the surviving spouse inherits assets without also becoming responsible for a significant tax burden. A bypass trust may provide the answer.

Understand the goals of a bypass trust

Leaving all of the assets to a surviving spouse result in the surviving spouse bearing the burden of estate taxes that can eat away at the total asset value. Bypass trusts give wealthy couples the tools they need to maximize exemptions from estate taxes.

Recognize the two parts of a bypass trust

Every bypass trust contains two individual trusts. Trust A is sometimes referred to as “the survivor’s trust,” because the surviving spouse receives any assets that are put into this trust. The surviving spouse completely controls this trust and can spend or give away assets from this trust. Trust A is exempt from federal or state estate taxes. Assets put in Trust B typically go to the couple’s children, which is why it may be referred to as a family trust. It is also exempt from estate taxes in most cases.

Notice the potential complications of a bypass trust

Although bypass trusts may allow surviving spouses to reduce their estate taxes, they do have some complex aspects that couples should consider. These aspects include:

  • May increase capital gains taxes
  • Requires regular maintenance of the trust by surviving spouse
  • Requires precise wording in order to be valid

Bypass trusts must be planned carefully

Since bypass trusts allow legal ways to reduce estate tax liabilities, they are placed under enormous scrutiny in order to make sure that they follow the law. Early and careful planning is required in order to make sure that your surviving spouse receives the correct assets.