Older Estate Plans May Cause Tax Problems for Beneficiaries

Most family estate plans created prior to 2012 contained a “bypass” or “A-B” trust that requires the estate to be divided into two or more subtrusts after the death of the first spouse.  Due to changes in the law, this division may not be necessary to avoid estate tax, and is potentially burdensome and unnecessary for the surviving spouse.  Further, it may result in capital gains tax on the assets in the bypass trust. It requires a separation of your property into two or more parts, and then a tax return for the bypass trust every year for the life of the survivor.

The purpose of these subtrusts was to minimize estate taxes by effectively doubling the size of the estate that is not subject to tax.  Two things have changed: first, Congress created  the concept of “portability,” which allows the surviving spouse to use the unused exemption of the deceased spouse, and second, the exemption amount has changed from one million dollars in 2000, to 11.58 million dollars, per spouse, as of 2020. This means that unless the estate is more than $23.16 million, there will be no estate tax, and no bypass or A-B trust is needed for that purpose. 

The result can be that although there is no estate tax to the upon the survivor’s death, the assets that were put into the “bypass” trust do not get a stepped up basis upon the survivor’s death, so capital gains tax may be due that would have been avoided if the entire estate were not divided upon the deceased spouse’s death.

We will review your estate plan documents without charge and help you determine if changes are advisable.