Family Money Values

Should You Ditch Your Bypass Trust?

by · November 1, 2011

My Mom and Dad set up their own living trust because they had to deal with taking Mom’s parent’s estate through probate court and they wanted to shelter my brother and I from that ordeal.

Do It Yourself Trusts Didn’t Work Out
Unfortunately, they used a do-it-yourself form and did not consult an estate lawyer or accountant. Dad died first and everything went to Mom as trustee. When Mom died, their estate was eligible for estate taxes and indeed we had to pay over $80,000 to Uncle Sam.

Since they spent most of their lives poor, and really weren’t rich when they died, we were very bitter about having to pay that tax. Dad ate bologna sandwiches and did without five cent candy bars for years – and now we have to fork over $80K of their money to the government! If Mom had been able to use Dad’s estate tax exclusion amount we would not have owed any estate taxes.

We Have a Bypass Trust
Because of that experience, in the late nineties, hubby and I each set up a living by-pass trust to enable use of each of our exemptions from the estate tax.

Our trusts and wills are set up so that any assets each of us owns at death rollover into the trust. The trusts are both set up so that an amount equal to the current estate tax exemption amount goes into a trust for our kids with the the one of us that survives being the trustee. The rest goes into a living trust for whichever of us survives the other.

To read more about trusts, you can checkout What Happens If You Die Today.

Trusts Can Be a Pain to Maintain
To be honest, having these two trusts is kind of a pain and costs us more in administrative expenses.

First we had to spend hours and a couple of thousand dollars to get them set up and signed properly.

Then, we had to change the ownership of all existing investment assets to be one or the other of the trusts. Next we had to set up separate accounts at the brokerage, instead of just one. This costs us an extra $125 a year in account fees.

We also have to try to keep the values of each trust about equal, so that involves transferring money back and forth between them.

Record keeping and tracking is also more complicated because of the extra accounts.

In the past year we have been trying to explain the setup to our kids and their spouses, which involved several discussions about what estate planning is. Although this is not a bad thing, explaining our choice of successor trustees was a bit hairy as we chose one of the sons with the other as a backup.

Finally, the darn tax laws keep changing, making us wonder if we should keep these trusts, change them or just ditch them.

Tax Law Changes (and changes and changes)
In 2010, congress passed new tax laws that raised the estate tax exemption for each person to $5 million dollars – and let me tell you, we are not even close to needing that big of an exemption each. In addition, they changed the laws to let spouses keep each others exemption.

So – the way I understand it, if hubby died and his estate was worth $1 million – he would not owe any estate taxes. I could use his entire exemption of $5 million, in addition to my own exemption of $5 million when I died. Again, there is very little chance I will have $10 million when I die.

What Should You Do?
Could we avoid the hassle, complexity and extra expense of the trusts? Should we change our wills so that they don’t try to roll a $5 million exclusion amount into the irrevocable trust? Should you, if you are in the same situation?

What We Did
So far, we have chosen to change nothing. Here’s why:

  • Inertia – there is always something more entertaining or urgent to do.
  • We think we’ll live forever – seriously we are still relatively young and healthy so there isn’t a sense of urgency to deal with it.
  • It would be a hassle to change all of our accounts.
  • It would be a hassle and expensive to get the plans changed by a lawyer.
  • The 2010 law expires in 2012.
  • We think congress will have to re-instate estate taxes at a lower level – because of the nation’s current woes.
  • We think the ‘portability’ clause will go away.
  • Even if portability sticks, our executor would have to apply by filing an estate tax return.
  • If one of us re-married after the other one died, portability only applies to the last spouse you have.
  • We have other clauses in our trusts that regulate when heirs get the money and what they can use it for before that age.
  • We still want our kids to be able to avoid probate if possible.

What We Might Want To Do
Change the trusts to be ‘disclaimer trusts’.
According to: New estate tax lawchanges role of bypass trusts Couples who trust each other may beable to dispense with expensive estate planning tactic. By Teresa Mears on Mon, Jan 31, 2011 6:05 PM

“Lawyers are now touting an idea they used to belittle: disclaimer trusts. You leave everything to your spouse outright, but give her the right to disclaim (turn down) all or part of the inheritance and have it go into a bypass trust, allowing her to make an informed decision based on her finances and the latest federal and state estate tax laws. “

We might want to do a “pretend I’m dead” walk through with our accountant and executor – to make sure that we have the right assets under trust and that the remaining spouse will have enough money and freedom to operate on it.

Do you have a bypass trust? What are you doing with it? Do you think we need to change ours?

Here are a few articles you might want to checkout if you too are wondering what to do with your old bypass trust:

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