RESOURCES
Clients

HOW TO USE BY-PASS TRUSTS TO SAVE ONE MILLION DOLLARS OF ESTATE TAX

THREE EASY CONCEPTS

1. A married person can leave any amount of assets to his or her spouse, free of Federal and State estate taxes.

2. For transfers to anyone other than a spouse, everyone has a Federal "exemption" which is currently $2,000,000 and which may increase to a total repeal of estate taxes in 2010. Everyone also has a Connecticut exemption of $2,000,000. But WATCH OUT!!. The Connecticut exemption disappears completely if your estate is ONE PENNY OVER TWO MILLION DOLLARS.

3. The effective Federal Estate Tax rates on all assets over the exemption is approximately 45% on assets which are included in your estate at the time of your death, decreased by any gifts you made during your lifetime. Connecticut estate tax rates are from approximately 5% to 16%.

HOW SIMPLICITY CAN COST YOUR FAMILY
ONE MILLION DOLLARS

1. Joint Ownership and "Simple" Wills.

Most people are familiar with "joint" property. If you, your spouse receives the asset. The result is the same with "all to my wife or husband" wills.. If a couple's assets (including life insurance, employee pension plans, IRAs and other retirement assets, businesses, etc.) exceed the exemption amount, then joint ownership could be a tax disaster.

2. The Cost of Simplicity.

John and Mary Smith have the following assets:

With their "simple" wills and joint ownership, the survivor of John and Mary will have an estate of $4,580,000. For purposes of this illustration, we are ignoring state death taxes and administrative expenses. Although there will be no Federal estate tax when either of John or Mary dies, their children will pay approximately $1,161,000 to receive their assets after John's and Mary's lifetimes.

ILLUSTRATION:

HOW TO SAVE ONE MILLION DOLLARS

The Smiths' estate tax bill is so high because they did not take advantage of both of their estate tax "exemptions."

Their neighbors, the Joneses, fared better:

DIVIDE: Bill and Jane Jones also have $4,580,000 of assets. However, they have arranged their holdings so that each of them has separate, equal shares.

CONQUER: Instead of leaving all of their assets outright to each other, they have each provided that assets equal to the "exemption" pass to a "bypass trust" for the other's benefit.

DESIGN OF BYPASS TRUST:

The "bypass" trust can be designed to give your spouse as many of the benefits of outright ownershipas possible while, at the same time, keeping the assets (and all appreciation) out of her estate.

EXAMPLE: She could have:

1. All income distributed to her.

2. The right to withdraw up to 5% of the principal each year.

3. The ability to have principal distributed to her for her "best interests, general welfare and happiness" by an independent trustee. She could also be the sole trustee, but her rights to principal would have to be based upon her needs for support and health care.

4. The right to direct the trustee to distribute the trust assets, either during her lifetime, or by her will, among a group of people such as your children and grandchildren. This group could also include spouses of children, nieces and nephews.

TAX SAVING ILLUSTRATION:

1. Each of the Joneses has $2,290,000 of separate assets.

2. Assume that Mr. Jones dies first and leaves $2,000,000 in a bypass trust for Mrs. Jones’ benefit, with his remaining assets passing directly to Mrs. Jones..

The trust is exempt from taxes in Mr. Jones’ estate, and is not included in Mrs. Jones’ estate. (It does not matter how large this trust grows during Mrs. Jones’ lifetime. It will always be exempt from estate taxes.

3. Mrs. Jones’ estate will include her own assets of $2,290,000 plus $290,000 which passed to her from Mr. Jones. Thus, her estate equals $2,580,000.

4. Tax Computation:

Mrs. Jones’ Estate = $ 2,580,000
Mrs. Jones’ "Exemption" = -$2,000,000
Taxable Estate = $580,000
Approximate tax rate = x 50%

To IRS = $ 290,000

5. Comparison:

The Smiths' total taxes with simple wills = $1,161,000
The Joneses' total taxes with bypass trusts = $ 261,000

Tax savings with bypass trusts = $ 1,000,000

Copyright, 2006 Jeffrey L. Crown. All Rights Reserved. No unauthorized reproduction.

Home | About Us | Our Services | Resources | Links | Contact Us

This web site is designed to provide information in regard to the subject matter covered. It is made available with the understanding that the Law Offices of Jeffrey L. Crown is not engaged in rendering legal advice via this web site. If legal advice or other expert assistance is required, the service of a competent professional should be sought.

THE LAW OFFICE OF JEFFREY L. CROWN
21 New Britain Avenue, Suite 208
Rocky Hill, Connecticut 06067

P: (860) 257-4330
F: (860) 257-4388