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Phone: 201-345-3018

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Bypass trusts serve as annual tax savings tools

New Jersey residents might be interested to hear that they can use bypass trusts as annual tax savings tools. Everybody has to pay taxes on their income; according to the assignment of income doctrine, they cannot simply hand their income over to another person in a lower tax bracket to avoid paying a higher tax rate. However, bypass trusts offer people an exception to this rule and may be used as a tool for asset protection.

A bypass trust is traditionally created when one of the members of a couple passes away. The trust allows some of the marital assets to pass on to the surviving spouse without it being subject to estate taxes that affect fund directly transferred. Furthermore, when the surviving spouse dies, he or she can name the rest of the family beneficiaries to the trust, which allows the family to protect the assets from an estate tax a second time.

Now, because of new tax laws, couples might want to name as many members of the family beneficiaries as possible. Creating a trust with multiple beneficiaries allows for more flexibility when distributing assets. Ideally, the assets would be given to the members of the family that are in the lowest tax bracket. This allows the asset to be protected from higher income tax rates.

Tax laws are constantly changing, and the traditional strategies for estate planning may become less effective over time. Estate administration attorneys might be able to assist people who want to protect their assets by suggesting and describing the different trust options available to them.

Source: Financial Planning, "New Flexibility for Bypass Trusts", Martin Shenkman, October 01, 2013

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