Calling an Audible: Avoiding Taxes Caused by a Bypass Trust

Since estate-planning maneuvers can cause unintended consequences, it’s important to plan with flexibility. A recent article discusses how one man dealt with the unintended consequences of a bypass trust he inherited from his wife before it was too late.

Bypass trusts are a very common estate-planning tool used to pass wealth to several generations. Angie Stephenson, partner at ParenteBeard Wealth Management LLC, explains that “these [bypass] trusts were common years ago when the estate-tax exemption was much lower, so you see them in many wills.”

When this particular man’s wife passed away, he received a bypass trust worth $730,000. In creating the trust, his wife’s intentions were that the trust provide him with income for the remainder of his life, and then distribute the remaining assets to their children. The problem was that when the children receive the remaining assets, they would also receive a large bill for capital gains taxes.