Already on ArticleSlash?

Forgot your password? Sign Up

Getting Around Estate Taxes With A Bypass Trust


Visitors: 348

To begin, a few words on the federal estate tax.

The estate tax is a high federal tax imposed upon the estate (the total of property and other assets owned) of a deceased individual. Currently, the tax stands at a 45% rate, meaning that, minus exemptions, nearly half of the estate would be taken by the government. Fortunately, several major exemptions to the estate tax exist:

- Spousal exemption - property passing from the deceased's estate to his or her spouse is considered exempt from the estate tax

- Charity exemption - similarly, property bequeathed to a qualifying charity organization is free from estate taxes

- Standard exemption - federal law provides a base $2 million exemption to all estates, in addition to the above two exemption. This base amount will increase to $3.5 million in 2009.

Given this information, avoiding estate taxes seems pretty simple, right? Simply leave your entire estate to your husband or wife, and you can easily and legally sidestep the whole problem - or so it would seem.

But what about the future? If you leave a $4 million estate to your wife, what happens when your wife dies? Say, for example, that she leaves her total estate to your children - not an unusual decision. Unfortunately, only the $2 million exemption would apply in this situation, meaning that 45% of the remaining $2 million would be taken by the government instead of your children. How do you avoid this second round of taxes?

Setting up a Bypass Trust

A bypass trust, appropriately, is a trust designed to “bypass" taxes on the estate of its beneficiary. As such, bypass trusts are extremely useful for smart estate planning. Let's return to the example above. We know that if you simply leave a $4 million estate to your wife, that same estate will be subject to taxes once your wife dies and tries to pass the property onto your children.

With a bypass trust, both you and your wife can avoid estate taxes. Here's how it works: Instead of simply passing your $4 million estate to her, you pass on only $2 million, and place the remaining $2 million in a bypass trust. After exemptions, no tax is owed on your estate: the trust passes under the standard exemption, while the remaining assets pass under the spousal exemption. The key, however, is that when your wife dies, she too can leave the same $4 million estate to your children tax-free: the bypass trust is exempt from taxes, and the remaining property can claim the standard exemption.

For more information on estate planning issues, check out the resources provided at the website of Austin probate lawyers Slater & Kennon, LLP. Visit

Joseph Devine


Article Source:

Rate this Article: 
Playa del Carmen Real Estate – Taxes Put to Good Use!
Rated 4 / 5
based on 5 votes

Related Articles:

Life Insurance and Estate Plans - Protecting Your Assets from Estate Taxes

by: Alan Fernandez (October 02, 2007) 
(Finance/Estate Plan Trusts)

Estate - To Trust Or Not To Trust That Is The Question!

by: Jeffery Voudrie (March 19, 2007) 

Estate Taxes

by: Cassandra Ingraham (January 06, 2007) 

Tulum Real Estate to Benefit from New Expressway Bypass

by: Thomas Lloyd (October 13, 2010) 
(Real Estate)

Estate - Do You Owe Taxes On That Gift?

by: Jeffery Voudrie (March 19, 2007) 

Real Estate REIT - Investing In Commercial Real Estate Is Easy With A Real ..

by: Dan Snyder (May 28, 2007) 

Gastric Bypass Requirements - Risks of Gastric Bypass - What is the Price of ..

by: Dr. Jim Greene (June 23, 2008) 
(Health and Fitness/Obesity)

Property Taxes on Real Estate The Basics

by: James Hussher (July 21, 2008) 
(Finance/Taxes Property)

Estate - How To Legally Avoid Taxes On Gifts And Inheritances

by: Jeffery Voudrie (March 22, 2007) 

Playa del Carmen Real Estate – Taxes Put to Good Use!

by: Thomas Lloyd (October 05, 2010) 
(Real Estate)