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Is a bypass trust right for you?

Many people understand how important it is to create a comprehensive estate plan. They want to ensure that their loved ones receive proper care before their passing, and they want to have a legal record of any final wishes for their own care or matters that may come up after death. Creating an estate plan with an attorney is an effective way to accomplish those goals.

When you pass away here in Washington, your loved ones might pay estate tax. However, there are ways to minimize your tax burden and leave some non-taxable assets to your heirs. One way to do this is to create a bypass trust.

What is a bypass trust?

Sometimes called an "AB Trust," a bypass trust divides assets into two different trusts when the estate owner passes away. The spouse of the estate owner can fully access one of the trusts – a marital or "A" trust. It is a revocable trust, meaning that the person who created it has the power to change the terms.

The other trust, called a family or "B" trust, doesn't technically belong to the surviving spouse. He or she can access the trust and any income it generates but cannot sell or give it away in any manner that violates the terms. It is an irrevocable trust, so its terms are unalterable. The trustee could be the living spouse or someone whom the living spouse appoints.

What are the pros and cons of a bypass trust?

This type of trust is best for married couples who have a high level of assets. Using this kind of trust can reduce the amount of federal and state estate taxes. The exemption limit for assets in a B trust is $22.8 million for a married couple. Heirs of the surviving spouse also won't have to pay the estate tax on any amount under the exemption limits. The trust can pay creditors and isn't subject to the process of probate.

However, a trust like this has to be constantly maintained, meaning the surviving spouse must maintain a usage record and ensure that the assets of the trust are distributed as the owner wished. Since the living spouse doesn't have full control of the trust, he or she may not be able to access the full income. Establishing the trust can also be a long process.

Is it right for you?

There are several factors that determine whether a bypass trust is right for you and your family. If you have questions about the best solutions for your estate plan, an attorney who specializes in this legal field can help. The most important thing is that you and your loved ones have a plan in place to ensure their care.

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