Taxation & Estate Planning

Everything Old Is New Again ? The Effect of Portability Clauses on Bypass Trusts

By michael

I was worried that after the passage of the last tax compromise that estate planners wouldn’t have anything to argue over – silly me.

There is an ongoing debate about whether or not, in light of exemption portability, bypass trusts should still be used.  On the one side are proponents (among whom I count myself) who say they should still be used because portability isn?t automatic – executors must file estate tax returns to receive the benefit, portability doesn?t apply to the GST tax, portability may leave us in 2013, and leaving your assets outright to your spouse provides no asset protection.  On the other side there are those who think such bypass trusts are not necessary any more because portability is here to stay (which seems awfully speculative to me), and having a bypass trust could be inconvenient for your spouse if funding the trust leaves nothing outside the trust.

These lawyers are now promoting a tool they used to belittle: disclaimer trusts. You leave everything outright to your spouse, giving your spouse the option to disclaim the inheritance into a bypass trust. This allows your spouse to review finances, federal estate taxes, and state estate taxes before making a decision. However, disclaimers can be tricky, and you have to really trust your spouse to disclaim the property when appropriate.

?Now the new game in estate planning is an old-fashioned form of trust?between spouses.?

The above quote is from the Prolific Professor Beyer who writes about the topic in his post here which links us to this story in Forbes.  Disclaimers can be tricky things though so be sure consult a qualified estate planning attorney in your area about what’s right for you.

A disclaimer trust differs from your regular bypass trust primarily  in that you leave everything to your spouse outright but give her the right to disclaim (turn down) all or part of the inheritance which then passes into a bypass trust.  Giving her the option to do so after your death allows her (I’m presuming the husband died first because statistically we do)  to make an informed decision based on her finances at that time and the latest federal and state estate tax laws then applicable.  The danger here is whether that informed decision can be made in the 9 months after your death, which is the time the surviving spouse has to make a qualified disclaimer, that the disclaimer is done right and that you trust your spouse to make the right decision…  Hopefully that last concern is your least.

Again, this stuff isn’t easy so:

Step 1:  Put down the pencil.

Step 2:  What’s wrong with you?!

Step 3:  Call someone who knows what they’re doing.

Your kids will thank you.

Full post as published by The Ohio Trust & Estate Blog on February 03, 2011 (boomark / email).