We Don’t Need No Stinking Bypass Trusts Anymore. Do We?

30 Mar

Doesn’t the title to this blog just flow from your lips?  So, when a spouse wants to make a gift to their spouse while they are both alive, there’s really been no limits because the transfer tax laws say there’s none.  Same thing when the first spouse dies and gives the estate to the surviving spouse.  So she bequeaths $54 million to him.  Fine.  But whether he survives her by ten minutes or ten years, at some point, he too shall die and then, the question remains, what shall the transfer taxes be on his estate?

So with non-spouse transfers, there’s been limits before a transfer tax kicks in.  You’ve heard of the estate/death/inheritance tax and the gift tax.  There’s also a generation skipping transfer tax that you probably haven’t heard of.  They’ve usually all had the same lifetime exclusion amount and if you exceed that amount when you’re transferring assets, a tax has to be paid.

If we go back to the good old days when it was simple (Hah!), a million dollars was that limit for each of us.  Now the gift tax had along with its lifetime exclusion also an annual exclusion.  That was good for donors because it allowed living transfers, if that amount or less, to pass without hardly any tax implications; no gift tax, no reduction if the lifetime exclusion, and usually not taxable to the recipient.  Exceed that annual exclusion with a living gift, and you would reduce your lifetime exclusion for your estate tax by the same amount and definitely affect your exclusion for generation skipping transfer taxes.

Let’s stay in these good old days for this example.  If you’re adding up in your head lifetime exclusions, spouses don’t get to do that.  Example: So you’re a real Texas gentleman and die first, leaving your widow to have some time to herself.  You better leave her everything!  Heck, you know that what’s yours is hers, what’s hers is hers, and what you owned together was hers anyway.  So if you had a $1 million lifetime exclusion and she did too, later when she dies, $2 million would transfer estate tax free.  Right?  Wrong.  You lost your lifetime exclusion when your assets went to your widow.  When she dies and gives it to the kids (and it doesn’t change the estate tax if there’s 1 or 15 of them), everything over the first $1 million is subject to the estate tax which is about 50%.

To be continued….

Photo Credit Don DeBold

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