Planning Potpourri

Have Your Tax Cake and Eat it Too. So you want to fund a $5M bypass trust on the first death to maximize GST benefits and growth outside your estate. But you live in a state that has decoupled from the federal estate tax and which only has a $1M exemption. So it would cost nearly $400,000 to fully fund the bypass trust. Is there a better option? If the surviving spouse can use the exemption from the deceased spouse to protect an inter-vivos gift, this may provide a valuable cure to an outdated will. The surviving spouse could choose not to disclaim into a less then optimal bypass trust and then to simply gift the assets, protected by the same exemption that would have protected the bypass trust from estate tax, and then gift to a new trust formed to meet the current planning objectives. This may also provide a practical solution to fully funding a trust without triggering state estate tax in a decoupled estate on the first spouse’s death. Few states that have decoupled have a gift tax. So rather than fund a bypass trust on the first spouse’s death that might require the payment of a state estate tax, the surviving spouse should endeavor to inherit outright and then immediately gift the assets to a newly formed inter-vivos trust. However, the deceased spouse runs the risk that the surviving spouse will not make the intended gift but instead make a different disposition of the inherited assets. But hey, that’s what makes reality shows exciting!

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