Married couples with significant assets valued at more than the amount that is exempt from estate tax (now $675,000.00) should consider revising their Wills to include a Bypass Trust, as explained below:
SIMPLE WILL. A married couple with simple Wills leaving everything to each other and then the children are not taking advantage of exemptions that they are entitled to under the federal estate tax law. The following is the result of having simple Wills:
Everything passes to the surviving spouse at the first death;
After the second death everything passes to the children;
There is no estate tax at the first death because of the unlimited marital deduction;
The entire estate is taxable on the second death, with an exemption for the tax on only the first $675,000 (this amount to be increased to $1,000,000 by the year 2006);
Estate Tax Rates start at 37% for any amounts in excess of $675,000;
The tax exemption for first spouse to die is wasted.
BYPASS TRUST WILL. By having Wills which incorporate a Bypass Trust to take advantage of the estate tax exemption for the estate of the first to die, the couple can save a considerable amount of estate tax. The following is the result of having such Wills:
At the first death, the deceased spouse's interest in assets, up to an amount equal to the estate tax exemption (now at $675,000), passes to a Trust with the following provisions:
Surviving spouse can be the Trustee;
All income can be payable to the surviving spouse;
Principal can be taken out for certain needs of the surviving spouse, i.e., health, education, maintenance and support.
Assets of the deceased spouse in excess of the exemption amount (now $675,000) pass to the surviving spouse;
There is no estate tax at the first death because the trust takes advantage of the $675,000 exemption amount and everything else is subject to the unlimited marital deduction;
The assets in the Trust are not included in estate of the survivor, even if they have appreciated in value by the time of the survivor's death;
With this plan a couple can pass up to $1,350,000 (or $2,000,000 by the year 2006) to children free of estate tax.
It is very important that assets pass through the Will so that they will be available to fund the Trust.
Assets held with rights of survivorship will not pass under the Will and therefore cannot fund the Trust;
Assets that pass according to a beneficiary designation should designate the Trust so they will be available to fund the Trust.
See examples following:
TAX SAVINGS WITH BYPASS TRUST WILL*
SIMPLE WILL- Estate of First Spouse to Die
$800,000.00
- All $800,000.00 to Spouse
No Tax - Unlimited Marital Deduction - Estate of Second Spouse to Die
$800,000.00 + $800,000.00 =
$1,600,000.00 Estate Tax
Total to Children$380,250.00
$1,219,750.00**
II. BY PASS TRUST WILL
- Estate of First Spouse to Die
$800,000.00 - $125,000.00 to Spouse
or Marital Trust - $675,000.00 to Trust
(assuming death in 2000) - Estate of Surving Spouse
$800,000.00 + $125,000.00 = - Trust
$675,000.00 - Estate TaxTo Children
$96,000.00$829,000.00 - All to Children
- Total to Children:
TAX SAVINGS: - $1,504,000.00
$ 284,250.00
* Assume married couple, each spouse having an estate of $800,000.00.
** Based on federal exemption from estate tax of $675,000.00. This exemption will increase by the year 2006 to $1,000,000.00.