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Are bypass trusts still valuable in estate planning?

Feb 24, 2022 | Estate Planning

Couples in the midst of the estate planning process in Michigan may be interested in evaluating the use of bypass trusts so that a surviving spouse doesn’t have to pay estate taxes or achieve other tax benefits. The passage of the Setting Every Community Up for Retirement Enhancement, or SECURE, Act and the scheduled 50% reduction in the size of the federal estate tax exemption in 2026 has renewed interest in bypass trusts.

Spousal portability election limitations

Adding to the confusion in estate planning is the spousal portability election, passed into law permanently in 2013, that allows a surviving spouse to use the unused federal estate tax exemption of the deceased spouse, thereby giving the surviving spouse a double tax exemption. With the the benefits of this law, should married couples still consider a bypass trust to save their assets from estate taxation? In some instances, the answer is yes for the following reasons:

  • Portability won’t remove appreciation in the value of the assets.
  • Portability won’t apply if the surviving spouse remarries.
  • Portability won’t apply for generation-skipping transfer tax purposes.
  • Ported assets will be subject to potential lawsuits.
  • Using portability will cause the first spouse to die to lose control when the ported assets pass to the survivor.

Bypass trusts are still a viable alternative

Given the limitations of spousal portability elections, many higher-wealth couples should still bypass trusts when revising their estate plans. Discussing the consequences with a financial advisor or an accountant should be part of the process.

Married couples have many different choices when deciding how to protect their assets for their beneficiaries. Periodic review of an estate plan is a wise course of action when considering that federal estate tax rules tend to change frequently.