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Bypass trusts as an estate planning tool

Estate planners in Florida and elsewhere have long used bypass trusts as an effective estate planning tool for married couples with children. This vehicle contemplates the transfer of a couple's assets to such a trust upon the death of the first spouse, leaving the remaining assets outright to the survivor. After the death of the surviving spouse the trust's assets would pass directly to the children, bypassing the survivor's estate and saving estate taxes.

Tax law changes have altered the details regarding bypass trusts and may provide more tax benefits than were previously available. These changes could influence the ways in which bypass trusts are used in estate planning. Previously, a bypass trust would name only the surviving spouse as the current beneficiary entitled to distributions, with the children named as remainder beneficiaries. It is now possible to allow the surviving spouse and all descendants as current beneficiaries, with the trustee making annual distributions based upon the relative tax brackets of the beneficiaries at the time of the distribution.

The new laws allow for more trustee discretion in asset allocation, powers of appointment and other administrative matters. These suggest that new bypass trusts should be drafted in a manner that would give trustees more flexibility than was the case under prior law.

Married couples who have questions about effective ways to distribute assets to their children may wish to speak with an attorney who is experienced in estate planning and other areas of family law. Such an attorney may be able to suggest and prepare wills, trusts and other documents that are designed to take advantage of income and estate tax laws.

Source: Financial Planning, "New Flexibility for Bypass Trusts", Martin Shenkman, October 01, 2013

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