Bypass trusts can now be amended to take advantage of new tax laws. Bypass Trusts are also known as A/B Trusts, exemption trusts and credit shelter trusts. This type of trust includes all trusts are designed to protect against estate tax on the death of the second spouse. These trusts can be amended to receive a better basis increase, take advantage of income tax loopholes and shift income to beneficiaries in lower tax brackets.
Traditional Bypass Trusts are not eligible for a cost basis adjustment on the second spouse’s death. This can cause capital gains taxes when the assets are sold. This is because they are designed to not be included in the surviving spouse’s taxable estate, which is a good result for estate taxes, but not so good for income tax. Another disadvantage to traditional Bypass Trusts is that they are designed to have the capital gains taxes incurred taxed inside the trust. Under the current tax laws, this usually results in higher capital gains tax than would be charged if the capital gains were taxed at the beneficiary’s tax rates.
If you have a Bypass trust in your will or trust, please call my office about upgrading to an Optimal Basis and Income Tax Efficiency Trust. The Optimal Basis and Income Tax Efficiency Trust can be designed to allow a step up in basis on assets that have appreciated, no step down in basis on assets that have decreased in value, and to make sure income and capital gains are taxed at the beneficiaries’ rates. This trust can also be designed to protect against estate taxes. This will become important if the Estate Tax Exemption is decreased to $1 million in the future. When these trusts are passed on to other beneficiaries, they can be designed to allow a step up in basis on assets that have appreciated, no step down in basis on assets that have decreased in value, and to make sure income and capital gains are taxed at the beneficiaries’ rates. They can also be designed to fix the problem of a discount in basis caused by an asset being co-owned by two different types of trusts.
The Optimal Basis and Income Tax Efficiency Trust concept also emphasizes long-term asset protection planning for successive generations of a family. The trust assets are protected against divorce, creditors and lawsuits.
Even if your spouse has already passed away and your bypass trust has already been funded, I can help you amend this trust to an Optimal Basis and Income Tax Efficiency Trust. This can maintain the estate tax protection and still achieve the advantages of the Optimal Basis and Income Tax Efficiency Trust.
An existing irrevocable trust including an irrevocable life insurance trust or gifting trust can also be amended to an Optimal Basis and Income Tax Efficiency Trust. There may be a way to amend this trust without needing to file anything with the Probate Court depending on the language in the existing trust.
If you have a marital trust or a QTIP trust in your will or trust, it can also be amended to include the Optimal Basis and Income Tax Efficiency Trust provisions. The advantage of this for the QTIP is you will not have to file an estate tax return to make the QTIP election.
Please call my office to discuss upgrading your trust.