Does Portability Eliminate the Need for a Bypass Trust?

One of the many benefits of the American Taxpayer Relief Act of 2012 is that it made portability permanent. Often used as an estate-planning vehicle, portability allows married couples to share unused portions of their federal estate tax exemption. Another estate planning tool used to achieve this result is the bypass trust. A recent article considers whether bypass trusts are necessary after the passage of the ATRA.

Historically, the bypass trust was a very popular estate-planning tool among Americans. Also called a credit shelter trust, a bypass trust holds a person’s assets up to the remaining amount of his or her estate tax exemption. At the person’s death, the assets in the trust pass to the surviving spouse, and therefore avoid taxes due to the marital deduction.

The federal estate tax exemption for 2013 is $5.25 million. Therefore, through portability, a married couple can shelter up to $10.5 million from federal estate tax liability without the use of a trust. A bypass trust is therefore unnecessary unless a couple expects their estates to pass the $10.5 million mark. Importantly, if you plan to rely on portability in your estate plan, remember that it is not automatically applied to a surviving spouse, but must be timely applied for.

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