Estate Planning Advisor Bypass Trust. The Simplest and Easiest Way - PDF document

miller nash llp | Spring 2013 brought to you by the trusts & estates practice team Estate Planning Advisor Bypass Trust. The Simplest and Easiest Way to Reduce or Eliminate Estate Taxes • at the rate of 10 percent. Thus, Trust principal can be distributed Sally’s estate will end up paying a to Sally for her health, education, $100,000 Oregon estate tax. maintenance, and support. by Ronald A. Shellan • Sally as trustee can distribute trust If a bypass trust is utilized, that ronald.shellan@millernash.com 503.205.2541 $100,000 in estate taxes can be saved! income or principal to children and In Washington, where the estate ex- grandchildren for their health, edu- How many years will it take your emption is $2 million, even more can cation, maintenance, and support. kids to save $100,000 after taxes? For be saved. • Sally can be given the right to those readers who are married and Example 2: If Harry and determine after Harry’s death who have an estate of $2 million or more, a Sally, who are married, each have among her children and grandchil- bypass trust can save the ones you love $1 million in assets and Harry dren will receive the assets in the at least $100,000 in estate taxes. Do I dies and gives his $1 million to bypass trust, and whether they are have your attention yet? Sally in a bypass trust, when distributed to a child or grandchild A bypass trust is sometimes known Sally later dies, the $1 million in outright or in trust. as a family trust or a credit shelter trust. the bypass trust is not included (continued on page 7) When the first spouse of a married in her estate. She is treated as couple dies, he or she can pass all his or owning only the $1 million in her assets to the surviving spouse free assets that she owns outright. of estate taxes because of the marital There is no tax at Sally’s death inside this issue deduction. But when the surviving because the $1 million that Sally 2 Planning for the Blended spouse later passes on, his or her estate owns outright is fully sheltered Family will now be much larger because of the by Oregon’s $1 million estate tax 3 Your Buy-Sell Might Be assets inherited at the death of the first exemption. Great if You Die, but What spouse to die. Happens if You Live? Maximum flexibility can be built Example 1: Oregon has a 4 The ILIT Solution into a bypass trust. Here are the types $1 million estate tax exemption. of flexible provisions that a bypass trust 5 The Advantages of Using If Harry and Sally, who are for Sally might include: LLCs for Estate Planning married, each have $1 million in • Sally can be the trustee of the trust. assets and Harry dies and gives • All income of the trust can be dis- all his assets to Sally, she will die tributed to Sally or just as much as with an estate of $2 million. She she needs for her health, education, will have a $1 million exemption, maintenance, and support. and thus $1 million in assets will be subject to Oregon’s estate tax www.millernash.com

Planning for the Blended Family marriages and they need the combined estate. The net result is that the taxes income from the $1 million that each Ron describes are saved and the descen- has accumulated to maintain their dants of each parent receive a distribu- by R. Thomas Olson lifestyle. As part of their estate plan, tion of approximately $1 million. tom.olson@millernash.com they want to be sure that the surviving 206.777.7413 Another method for providing for spouse is able to continue to live in the obligations arising out of a blended manner to which he or she has become Estate planners are increasingly marriage is life insurance. Assume that accustomed, but also wish to leave as confronted with remarriage as part of Harry is relatively young, is in good much of their estate as reasonably pos- the considerations of a proper estate health, and has support obligations for sible to their children. plan. This is not solely attributable to young children. The support obliga- dissolution of marriages, but is also By using the bypass trust that Ron tions can be quantified by reviewing the because many are living longer and has described, the trust can provide that terms of the property settlement agree- healthier lives and there is increased the income be distributed to the surviv- ment or decree of dissolution. A term frequency of remarriage among our ing spouse, Sally for this discussion, at insurance policy, crafted to parallel the senior population. least quarterly. Additionally, the trustee support obligations, can be acquired for a modest monthly premium. The planning consider- Upon Harry’s death, the policy ations for the blended family proceeds will meet his obligation, range from the desire to take allowing Harry to plan his estate care of children to taking care for Sally’s benefit without regard of the new spouse. To address to the support obligation. these considerations, estate planning counsel requires As you know, members of complete information on the Miller Nash LLP practice in Wash- financial status of the parties to ington and Oregon. These articles the second marriage and legal are distributed to our friends and and contractual obligations to clients in both states, so they are children and former spouses. written in a general form to cover Sources of this information may both states. While the federal law include a property settlement overarches both states, each state agreement or decree of dis- has its own estate tax provisions. solution, pre- or post-marriage It is therefore important that you can make distributions of principal agreement, and detailed financial state- consult with an estate planning lawyer from the trust as necessary for Sally’s ments. With this information, your who is conversant with the tax provi- health, education, maintenance, and estate planning counsel can assist you sions of the state in which you reside. support. (In Washington, we recom- in crafting a Will or trust that meets mend the use of an independent trustee both your obligations and your desires to make decisions for the distribution regarding your new family. of principal.) Upon Sally’s death, the Trusts are a common planning tool. balance of the trust is distributed to Our colleague Ron Shellan has set forth Harry’s children under the terms the advantages of using a bypass trust he has set forth in the bypass trust. as a tax savings device in his article Remember, the bypass trust exists as a in this edition of the publication. That result of the provisions of Harry’s Will. same bypass trust can be used to solve Sally’s Will can have similar provisions, the planning issues of a blended family. establishing a trust for Harry. Both Let’s take a look at Harry’s and Sally’s Wills can also provide that the children situations in Ron’s hypothetical. As- of the second to die take their parent’s sume that both have children by prior 2 | miller nash llp | Estate Planning Advisor