Lifetime Bypass Trust


Until December 31, the lifetime gift tax exclusion is $5,120,000 per person. Unless Congress acts, this amount will drop to $1,000,000 on January 1, 2013.  It is usually best to use a tax exemption as soon as possible – use it or lose it.

The opportunity, good now through the December 31, is to gift assets out of your estate and forever exempt the assets and all future appreciation from estate tax.

When we explain this to our clients with medium to large estates, they understand the value and urgency of gifting now, but many of them need the assets to live on.  What good is it to give your children your assets when you still need your assets?

Enter the Lifetime Bypass Trust, also known as the spousal lifetime access trust. A lifetime bypass trust is an irrevocable trust that names your spouse as trustee and your spouse and children as beneficiaries. The assets you gift to the trust, and all future appreciation, will be exempt from estate tax.  Until December 31, you can gift up to $5,120,000 to the trust, although many of our clients gift less.

This is the “have your cake and eat it too trust.” The trust assets will be exempt from estate tax when you die, when your spouse dies, and when your children die. In addition, you will retain indirect control and use of the assets because your spouse is the trustee and beneficiary. And if your spouse sets up a similar trust for you, you would have direct control and access to that trust’s assets as trustee and beneficiary, and those assets would also be exempt from estate tax.

Another way to look at it. You gift assets to a trust for your spouse, and your spouse gifts assets to a trust for you. You each control and benefit from each other’s trust, and the assets in each trust will be exempt from estate tax. What a deal!

Just like the A/B trust. You may be familiar with the basic estate tax concept of the A/B trust. When the first spouse dies, a bypass trust (B trust) is funded with the deceased spouse’s share of the estate. By using the deceased spouse’s estate tax exclusion, the assets in the bypass trust are exempt from estate tax. The surviving spouse is typically the trustee and the primary beneficiary. This gives the surviving spouse control and use of the bypass trust assets, yet the assets remain exempt from estate tax.

The lifetime exemption trust uses the same principle as the bypass trust, but instead of creating and funding it at death, it is created and funded now (before December 31) using some or all of each spouse’s lifetime gift exclusion.

Be careful. If each spouse creates a trust for the other, the trusts must be drafted to avoid the reciprocal trust doctrine. If the IRS finds the trusts identical, it will disregard them and pull the assets back into the donor’s estate. To avoid this, we make the trusts different. For example: the trusts could be funded with different assets, the husband could be given a right to income while the wife is given the right to income and principal, the wife could be given a power to name additional beneficiaries and the husband not given that power, or each trust could have different successor trustees or remainder beneficiaries. There are a number of ways the reciprocal trust doctrine can be circumvented based on your unique situation.

Additional benefits. The assets in the lifetime protection trusts would be significantly protected from lawsuits and divorce claims. So in addition to reducing your estate tax liability, you would be gaining significant asset protection.

Deadline looms. The lifetime bypass trust is a terrific tool to reduce or eliminate estate tax. But it must be created and funded before December 31, 2012.

Keep in mind it typically takes about three weeks to establish and fund a lifetime bypass trust. If this strategy appeals to you, you must act now, as time is running out.

Gift Now and Avoid Estate Tax

Grim reaper

If you have a net worth of $1M or more (or as a couple, $2M or more), and act now, you could forever remove the threat of estate tax. But if you don’t act by the end of the year, you will miss a historic opportunity.

The 2012 estate tax exclusion and gift tax exclusion are both $5,120,000 – way higher than they have ever been. But unless Congress and the President act, both will crash to $1M on January 1, 2013.

If you die with more than $1M after December 31, 2012, every dollar over $1M will be taxed at 55%. If you die with a $2M estate, your children will get $1,450,000 and the government will get $550,000.

But here’s your big chance: If you gift assets out of your estate before December 31, you can remove up to $5,120,000 (double that for married couples) from your taxable estate.

Don’t think this opportunity is only for rich people. If you have assets that will appreciate – like real estate, business interests, or other investments, you should take advantage of this historic opportunity to remove assets and all future appreciation from your taxable estate.

I know what you are thinking – ok, I get it, I should remove assets from my estate to avoid a future estate tax, but I need those assets. Can I gift them, but still benefit from them? The answer is YES.

A lifetime exemption trust, sometimes called a spousal lifetime access trust, can remove the asset from your estate and give you indirect access to the income. Here’s how it works:
* Create an irrevocable trust which names your spouse and children as beneficiaries.
* Your spouse can be the trustee and direct the investments and distributions.
* Transfer assets to it before the end of the year.
* Your spouse, as trustee, can distribute income from the trust to herself and deposit it in your joint account – which means you will have access to the trust income, even though you gifted away the assets.

Your spouse can also create a lifetime exemption trust which names you and your children as beneficiaries. However, this second trust must be drafted very carefully with different provisions than the first one to avoid the reciprocal trust doctrine. If the IRS determines the two trusts are identical, it will pull the gifted assets back into your estate.

This is just one of many gifting strategies available.

If you would like to leverage this historic gifting opportunity, you need to act now. Planning will most likely take a several weeks and time is running out.

Lifetime Exemption Trust

Forbes - Giving

Forbes has a great article on lifetime exemption trusts, aka spousal lifetime access trusts. This is a great trust strategy to gift assets to your spouse and children and remove the assets from your taxable estate, but still receive benefits from the assets.