To preserve your estate tax lifetime exclusion, your good attorney put in your will (or your living revocable trust) a bypass trust. Might have called it credit shelter trust, might have called it the family trust, regardless, if drafted right, it followed the internal revenue code and could receive your lifetime exclusion upon your death. Your widow could be the trustee and the primary beneficiary of this trust, so her life seems just like it would if you left it outright to her, but for estate taxes, you’ve done a good thing for your family. When she dies, her estate may suffer death taxes, but the assets that were placed in your bypass trust should transfer to the kids with no death taxes, a very good thing.
So now it’s 2011 and the new law says you don’t have to have some fancy bypass trust to preserve your lifetime exclusion. You die and your executor/trustee can apply the unused amount of exclusion to your widow/widow’s estate without your late husband having a bypass trust. I don’t even want to go into the limits of this and what happens if she remarries.
What I want to communicate is that you should still seriously consider the bypass trust which doesn’t disappear if she remarries. If done right, it takes your lifetime exclusion and allows it to appreciate. It can go up in value and that value can still transfer to your kids upon your widow’s death without suffering the estate tax. It can also preserve the assets from generation skipping transfer taxes, which are not portable under the new law.
Please also remember that bypass trusts can protect their assets from the bad things that happen to good people, that is, they can have protection from unworthy creditors.
Photo Credit Born.to.be.mild