"The Living By-Pass Trust": Maximizing Today's Opportunities With Traditional Strategies

The 2010 Tax Relief Act offers historic opportunities for the preservation of family wealth and the transition of operating businesses within families. A $5 million lifetime gift tax exemption equivalent -- a robust $10 million exemption for married couples -- is not only unprecedented in scope but also generous in its application.

As recently as 2009, the lifetime gift tax exemption equivalent was only $1 million during a year in which the estate tax exemption was $3.5 million. The previous spread between the gifting options available during life versus the exemptions available at death was the backdrop behind the extraordinary news of the increase in lifetime gifting options created under the 2010 Act. The question many clients are asking is "What is the best way for me to take advantage of this temporary and generous tax opportunity?".

The fact that the $5 million exemption is available to tax payers during periods of unprecedented budget deficits and "Occupy Wall Street" protests, should be viewed as a non-recurring anomaly.

While the appropriate solution depends on the financial circumstances of each client, concern may be expressed by one spouse or the other regarding the loss of access to the gifted assets. Particularly in light of our recent economic experiences in the United States, the desire for greater flexibility and control is a natural response. The desire for flexibility among some clients has led to renewed interest in implementing a classic estate planning strategy known as the By-Pass Trust or Credit Shelter Trust.

By using your available credit prior to December 31, 2012, rather than waiting until death, you can secure the advantage of the higher exemption amounts while offering access to your spouse in the same way as would be achieved in the traditional By-Pass Trust structure. *See the illustration below for the details of the structure. * In addition to securing the $5 million exemption while it lasts, you are able to shift the benefits of future growth in asset value to descendants and remove the growth from your gross taxable estate (and that of your spouse). In community property states like Texas, greater care should be exercised when implementing trusts with your spouse as beneficiary. However, with proper planning, the traditional By-Pass Trust structure funded during life offers significant benefits for wealth preservation.

Very truly yours,
Randall S. Bond

Firm Overview | Attorneys & Staff
Articles & Cases | Billing Methods | Capstone
Write Us | Directions | Links | Home

510 Bering Dr., Suite 500
Houston, TX 77057-1457
713/850-0700 Fax: 713/850-8530