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Legal

By Philip J. Hundl, State Attorney

I appreciate your continued interest in this legal column. If you have a legal concern or question regarding a general legal issue, please submit your question to me for consideration in future columns. I have enjoyed receiving your questions and look forward to more in the future.

Question: I have heard a few of my friends talking about having trusts inside of their Wills. Can you explain to me what a bypass trust is in a Will? Is a bypass trust something I need to include in my Will? My husband and I have community property worth five million dollars and we have two sons and some grandchildren.

Answer: Bypass trusts are created by married couples to save estate taxes. Under the current estate tax laws, a person can own property worth $2,000,000 at death and the family will owe no estate taxes. In addition, a person can leave to a spouse an unlimited amount of property and there will be no tax at that person’s death.

As you mentioned, if you and your husband have five million dollars in assets, one-half of which would be owned by each spouse under our community property laws, the first spouse to die can leave $2.5 million to the surviving spouse without a tax consequence. However, upon the death of the surviving spouse, the non-exempt excess portion of the estate or $3 million ($5 million estate minus the surviving spouse’s $2 million exemption) would be taxed at 45% for a tax of $1.35 million.

However, if both you and your husband were to implement a bypass trust into your Wills, when the first spouse dies all of the community property would not go to the other. Instead, the decedent would transfer $2 million of the decedent’s estate of $2.5 million to a bypass trust for the benefit of the surviving spouse and children and the remaining $500,000 to the spouse.

Now, instead of having a $5 million taxable estate, the wife would have only a $3 million taxable estate, $2 million of which could pass tax-free. The estate tax would fall to $450,000, which is a savings of $900,000. In 2011, the estate tax exemption is scheduled to fall to only $1 million, so married couples worth much less should consider bypass trusts.

Usually the wife will be the primary beneficiary of the bypass trust, and she will also be named as trustee. During the rest of the wife’s lifetime, the income and the principal of the trust can be used for her and the children’s health, education, maintenance and support.

After the wife’s death, the trust will terminate and the assets will be distributed according to the terms of the husband’s will.

Philip J. Hundl is a shareholder at the law firm of Wadler, Perches & Hundl in Wharton, Texas and State Attorney for the K.J.T. Attorney’s note: The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.

Submit your questions for this column via email to phundl@wadlerperches.com or via U.S. Mail to Wadler, Perches and Hundl, Philip J. Hundl, KJT State Attorney c/o KJT Legal Column, 105 W. Burleson Street, Wharton, Texas 77488.




	Home President Spiritual Advisor State Officers Insurance Marketing Director Sales Representatives Life Insurance Events Calendar Culture Benefits Forms Contact Us Activity Center Links		Legal By Philip J. Hundl, State Attorney I appreciate your continued interest in this legal column. If you have a legal concern or question regarding a general legal issue, please submit your question to me for consideration in future columns. I have enjoyed receiving your questions and look forward to more in the future. Question: I have heard a few of my friends talking about having trusts inside of their Wills. Can you explain to me what a bypass trust is in a Will? Is a bypass trust something I need to include in my Will? My husband and I have community property worth five million dollars and we have two sons and some grandchildren. Answer: Bypass trusts are created by married couples to save estate taxes. Under the current estate tax laws, a person can own property worth $2,000,000 at death and the family will owe no estate taxes. In addition, a person can leave to a spouse an unlimited amount of property and there will be no tax at that person’s death. As you mentioned, if you and your husband have five million dollars in assets, one-half of which would be owned by each spouse under our community property laws, the first spouse to die can leave $2.5 million to the surviving spouse without a tax consequence. However, upon the death of the surviving spouse, the non-exempt excess portion of the estate or $3 million ($5 million estate minus the surviving spouse’s $2 million exemption) would be taxed at 45% for a tax of $1.35 million. However, if both you and your husband were to implement a bypass trust into your Wills, when the first spouse dies all of the community property would not go to the other. Instead, the decedent would transfer $2 million of the decedent’s estate of $2.5 million to a bypass trust for the benefit of the surviving spouse and children and the remaining $500,000 to the spouse. Now, instead of having a $5 million taxable estate, the wife would have only a $3 million taxable estate, $2 million of which could pass tax-free. The estate tax would fall to $450,000, which is a savings of $900,000. In 2011, the estate tax exemption is scheduled to fall to only $1 million, so married couples worth much less should consider bypass trusts. Usually the wife will be the primary beneficiary of the bypass trust, and she will also be named as trustee. During the rest of the wife’s lifetime, the income and the principal of the trust can be used for her and the children’s health, education, maintenance and support. After the wife’s death, the trust will terminate and the assets will be distributed according to the terms of the husband’s will. Philip J. Hundl is a shareholder at the law firm of Wadler, Perches & Hundl in Wharton, Texas and State Attorney for the K.J.T. Attorney’s note: The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances. Submit your questions for this column via email to phundl@wadlerperches.com or via U.S. Mail to Wadler, Perches and Hundl, Philip J. Hundl, KJT State Attorney c/o KJT Legal Column, 105 W. Burleson Street, Wharton, Texas 77488.