Types of Trusts – Bypass Trust, Revocable Living Trust

Questions and Answers Regarding Trusts

Question: What is a Bypass Trust?

Answer: A Bypass Trust is a trust into which a decedent's estate passes so that the surviving heirs get a life estate in the trust rather than the property itself in order to avoid estate taxes on an estate larger than the tax credit sheltered amount under the Unified Estate-and-Gift Tax Act under Tax Credit.

Question: How much is exempt under the Tax Credit section?

Answer: This amount changes from year to year. A Bypass Trust is also known as a Life Estate or A-B Trust and is a way for couples of combined estates of more than $1 million to be exempt from estate tax if one or the other dies.

The amount that is exempt from Federal Estate Tax increases to $1.5 million in 2004 and 2005, $2 million in 2006 through 2008, $3.5 million in 2009 and then in 2010 there will be no federal estate tax. However, in 2011 the Federal Estate Tax will return to the 2002 level.

A Bypass Trust is designed to allow the $1 million tax exemption to be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent's estate free of estate taxes. The surviving spouse never legally owns the property within the Trust because it's legally owned by the Trust itself. The spouse can use the assets and property within the estate with certain restrictions. However, when the surviving spouse dies, if the estate is worth more than $1 million, a significant amount of estate taxes will be due before the beneficiaries can receive their inheritance.

Question: When should a person consider preparing a Revocable Living Trust instead of a Will?

Answer: If a single person has an estate worth more than $2 million (2002 and 2003), they may be better off with a Revocable Living Trust for the following reasons:

They save a great deal of money. Probate costs and fees can get quite costly, leaving their heirs with much less of your estate than what they intend to give.

In some states, probate fees are based on the estate's appraised value rather than the actual amount of equity in the estate. In other states, probate fees are based on the amount of work reasonably performed by a probate attorney. With a trust, no executor is necessary because the same work done can be done by the Successor Trustee (usually a family member). Additionally, because the assets are owned by the Trust, they are not subject to probate administration, so you don't have to pay the probate administration fees out of your estate.

Because Revocable Living Trusts can be quite complicated, it is in the person's best interest to seek legal counsel to assure that their plan goes as smoothly as possible.

Question: What is a Revocable Living Trust?

Answer: A revocable living trust is an arrangement made for management and distribution of your property. Like a will, the trust is "revocable," meaning that you can modify or eliminate it at any time.

These trusts are established by a written agreement or declaration that appoints a "trustee" to administer the property with detailed instructions on how the property is to be managed and eventually distributed. The trust may substitute for probate (court administration of property after death) or for guardianship (court administration after incapacity), if the trustee has detailed instructions about how to handle these situations. A revocable living trust agreement or declaration is usually longer and more complicated than a will, and transfers of assets to the trustee can be time-consuming and expensive.