Many New Jersey families are looking for ways to reduce their estate tax burden. One option for married couples lies in using a bypass trust to hand down retirement savings. In order to make use of this tool, it is important to understand how these trusts work and how to maximize their effectiveness in reducing estate tax obligations.
Some retirement savings are not good candidates for a bypass trust. Any savings that are already granted tax advantages would not be best suited for such a trust. Creating a bypass trust allows the trust itself, and not one’s chosen heirs, to be the beneficiary of certain retirement plans. Assets used to fund a bypass trust are eliminated from an individual’s taxable estate.
The trust is not funded until the first spouse passes away. If assets placed within the trust appreciate in value, the amount of that growth is not subject to estate taxes. This is true even after the death of the second spouse. At that point, the named beneficiaries can continue to receive distributions from the trust.
Bypass trusts are powerful estate planning tools for New Jersey families. That said, it is imperative that these vehicles be properly constructed, funded and managed. Failure to structure a bypass trust in the proper way can result in an outcome that fails to meet the primary goal, which is to reduce the estate tax obligation of the individuals who fund the trust and to pass down as much wealth as possible to the chosen heirs.
Source: urologytimes.modernmedicine.com, “Minimize estate taxes with a bypass trust“, Joel M. Blau and Ronald J. Paprocki, Dec. 1, 2015