Illinois Estate Planning & Elder Law Blog

A Bypass Trust, also known as a Credit Shelter Trust, lets a married couple double the estate tax exemption.

If the husband dies first, his assets fund an irrevocable trust for the children up to the estate tax exemption amount which is currently $3.5 million. All remaining assets go to the widow in a second, separate trust. The first trust (the children's trust) is drafted to allow the widow access to the principal for medical costs and other needs. This safeguards against the funds in the widow's second, separate trust from being completely depleted and the widow running out of money without access to the husband's $3.5 million trust.

The advantage is that when the widow dies, she can pass on $3.5 million in assets tax free to the children. Also, the Bypass trust allows for another $3.5 million in assets to be passed on tax free to the children.

Another benefit to the first spouse to die is that this arrangement ensures that the assets will go to the children and not a second spouse of the widow.

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Couples can give up to $26,000 per year without incurring any gift taxes. Singles are allowed up to $13,000 per year.

Because the federal estate tax exclusion is $3.5 million this year, taxes are not a concern for many people. A bigger concern is if your assets will be enough to last for the rest of your life. If you are a 65-year-old retiree and estimate you will need to draw $60,000 (adjusted for inflation) from your investments to maintain your standard of living, you will need about $1.5 set aside for yourself.

To hedge against the likely possibility that Congress will lower the federal estate tax exclusion, possibly as low as $1 million, gifting now will achieve that result. Now is an ideal time to give gifts of depreciated stock. For example, if you own American Express stock which sold for over $60 in June of 2007 and today sells for $25, you can give more than twice as much American Express stock today without triggering a gift tax as you could two years ago.

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Children under the age of 18 cannot directly inherit more than a small amount of money. If you make no provisions in your will, a court will appoint a property guardian to manage your child’s assets until he reaches 18.

That property guardian may be a stranger who will add another layer of bureaucracy to the situation. When your child needs money, formal requests will need to be made through the court system.

One solution is to set-up a custodial account for your child. You are allowed to choose the custodian, and the custodian makes decisions regarding how the money is spent. Once your child turns 18, the money is your child’s to spend as he pleases.

As Stacy L. Bradford points out in her Wall Street Journal piece titled, “Deciding if Your Kid is Trust-Worthy”, a better alternative may be to set up a trust. A trust allows more control over how money is spent once the parents are gone. The parents can specify how the trust money is to be spent, for example on college tuition, and a trust can delay the age at which the child has access to the money, for example the child gets half at age 30 and the other half at 35.

The trustee makes all of the decisions, so it’s important to pick a person who is trustworthy, financially astute and diligent.

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