Bypass Trust
Maryland Bypass Trust Lawyer
Experienced Bypass Trust Lawyer Serving Anne Arundel County, Washington D.C., and Beyond
When one spouse dies before the other, the deceased spouse’s assets are usually transferred to the surviving spouse. Unfortunately, if these assets are worth over a certain amount, they can be heavily taxed. Additionally, if the deceased spouse has specific wishes for their assets, it can be hard to ensure the surviving spouse actually handles those assets according to their deceased spouse’s wishes. Because of this, many couples with significant assets turn to bypass trusts. These can help ensure that, if one spouse dies, their assets are handled exactly how they want them to.
If you are looking to establish a bypass trust, Maryland trust attorney Raymond E. Brown can guide you through the process and ensure that your wishes are honored. Take the first step toward securing your legacy–call The Law Office of Raymond E. Brown at (443) 554-9944 or reach out online to schedule a free initial consultation with a member of our team today.
What is a Bypass Trust?
A bypass trust, also known as a credit shelter trust, is an estate planning tool used to minimize estate taxes and efficiently transfer assets to beneficiaries, typically spouses and heirs. This type of trust is typically used by married couples with a large amount of assets.
When one spouse passes away, all or part of their assets are put into a trust, rather than transferred directly to the surviving spouse. This allows the deceased spouse’s assets to be protected in the trust and also shielded from estate taxes.
If the deceased spouse’s assets do not exceed the estate tax exemption amount, the surviving spouse will not have to pay any estate taxes on the assets. In Maryland, the individual state tax exemption amount is $5 million and is not indexed for inflation. In 2024, the federal estate tax exclusion amount is $13.61 million for individuals, according to the Internal Revenue Service (IRS).
It’s important to note that, like other traditional tax planning vehicles, bypass trusts are subject to specific rules and regulations, and their effectiveness can vary depending on changes in tax laws as well as individual circumstances. As such, it’s advisable to consult with a qualified Maryland estate planning attorney to determine if a bypass trust aligns with your estate planning goals and to ensure it is structured correctly to achieve the desired outcome.
Bypass Trusts vs. Marital Trusts
There are many different different types of trusts people can establish for various purposes. Two very similar types of trusts are bypass trusts and marital trusts. Both are designed to protect the deceased spouse’s assets for their beneficiaries and also shield them from estate taxes. However, the main point of a marital trust is to provide for the surviving spouse’s financial needs and security.
Assets placed in a marital trust can provide income and support for the surviving spouse during their lifetime, with the remaining assets typically passing to other beneficiaries, such as children, upon the surviving spouse’s death. While both trusts offer tax-saving benefits, their primary focus differs: a bypass trust prioritizes estate tax reduction, while a marital trust emphasizes providing for the surviving spouse’s welfare and controlling the ultimate distribution of assets.
Bypass Trusts vs. AB Trusts
A bypass trust and a marital trust are actually two parts of the AB trust system. When one spouse dies, their assets are placed into a bypass trust, or “B” trust, where the surviving spouse cannot access them (with some exceptions). These assets are also shielded from estate taxes, up until the state or federal exemption amount. The “A” trust, or marital trust, typically holds any assets that qualify for the unlimited marital deduction, ensuring that they pass tax-free to the surviving spouse. The surviving spouse can access the funds in this trust for whatever they need.
Holding the deceased spouse’s assets in the B trust ensures that their beneficiaries receive the inheritance the deceased spouse left them. This can be useful when one spouse has children from a prior relationship. After the surviving spouse dies, the funds in both trusts can be distributed in accordance with their wishes.
If you are looking to establish a trust but are not sure which kind will work best for you, speak with an experienced estate planning attorney like Raymond E. Brown. Your attorney can help assess your specific needs and goals to determine which trust or combination of trusts is most appropriate for your circumstances.
How Does a Bypass Trust Work?
Here’s how it generally works: when one spouse passes away, their assets are transferred into the bypass trust instead of directly to the surviving spouse. This ensures that the deceased spouse’s estate tax exemption is fully utilized to shelter assets from estate taxes. The surviving spouse can still benefit from the assets held in the trust, such as receiving income generated by the trust’s investments or even using the trust property, but they do not own the assets outright. The surviving spouse can use their fiduciary and individual income to continue to live comfortably, even without access to all of their spouse’s assets.
Assets placed in the bypass trust are managed according to the terms specified in the trust agreement. When the surviving spouse dies, the assets are then distributed to the trust’s intended beneficiaries, typically children or other heirs, ensuring that the trust assets remain intact throughout the remainder of the surviving spouse’s life.
Benefits of a Bypass Trust in Maryland
Bypass trusts offer several key benefits that make them valuable tools in estate planning. Some of the primary advantages include:
- Reduced estate taxes
- Asset protection
- Control over asset distribution
- Preservation of family wealth
- Avoiding the probate process
Setting Up a Bypass Trust
The process of setting up a bypass trust has several key steps, all of which are necessary to ensure the trust is established correctly. First, a couple must determine if a bypass trust is right for them and whether or not it aligns with their estate plan wishes. If so, they can contact a legal professional to help them through the process.
Next, they can determine who the grantor, trustee, and beneficiaries will be. The grantor is the person who will own the trust, and the trustee is the person who will have control over the trust. The trustee won’t possess the assets in the trust, but they will ensure that the assets are invested and managed in accordance with the grantor’s instructions. The couple can name themselves as the grantor and trustee, and their children as the beneficiaries.
The next step is to draft the trust documents, including the trust agreement and any related legal documents. These documents outline the terms and conditions of the trust, like distribution provisions and asset management instructions. When the grantor passes away, their assets will be passed into the bypass trust and the instructions set out in their trust documents will go into effect. The trustee will manage the assets until the surviving spouse dies, and then the assets will be distributed.
If you’re considering establishing a bypass trust, it’s important that you speak with an experienced Maryland trust lawyer. They can help you explore your options to ensure you make the best choice for you and your family based on your unique circumstances. Not only that, but they can also help you through the trust administration process, ensuring that your trust is administered correctly and in accordance with your wishes.
Can the Surviving Spouse Access the Trust’s Assets?
No, normally, the spouse cannot access the bypass trust’s assets. However, some grantors may establish terms that allow their surviving spouse to access a portion of the assets for financial support, usually under certain circumstances. The surviving spouse may have the right to receive income generated by the trust’s assets, and may also be allowed to use certain trust property, like the family home, for certain purposes. All other assets held within the trust will remain separate from the surviving spouse’s estate and will be managed by the trustee according to the terms specified in the trust agreement.
Are Bypass Trusts Irrevocable?
Yes, bypass trusts are irrevocable trusts. Unlike a revocable trust, an irrevocable trust cannot be altered or revoked by the grantor once the trust is established. As soon as the grantor’s assets are transferred into the bypass trust, the trust becomes irrevocable, meaning the grantor relinquishes control over those assets. The assets are then controlled by the trustee following the trust agreement the grantor established.
How an Annapolis Estate Planning Lawyer Like Raymond E. Brown Can Help
Planning for the future is a critical aspect of ensuring your loved ones are cared for and your assets are distributed according to your wishes. Having an experienced Maryland trust attorney like Raymond E. Brown on your side is key to ensuring your trust fits right into your estate plan, protecting your assets and providing for your family once you’re gone.
When you partner with The Law Office of Raymond E. Brown, we’ll walk you through the process of establishing a bypass trust and can help you develop the terms and conditions of the trust. We can also help you understand how a bypass trust will affect your spouse’s Maryland estate tax returns and fiduciary income tax returns once the trust is established. We have extensive experience in Maryland trust administration and can help clients establish various different kinds of trusts, including:
- Living trusts
- Testamentary trusts
- AB trusts
- ABC trusts
- Personal residence trusts
- Irrevocable life insurance trusts
- Qualified Personal Residence Trust (QPRT)
- Grantor-retained annuity trusts (GRATs)
- Qualified Terminable Interest Property trusts (QTIP trusts)
- Pet trusts
- Special needs trusts
- Asset protection trusts
- And more
At The Law Office of Raymond E. Brown, we understand that every individual and family has unique needs and goals when it comes to estate planning. Whether you’re looking to protect your assets, minimize estate taxes, or ensure your loved ones are provided for after you’re gone, our dedicated legal team is here to help.
Interested in Establishing a Bypass Trust? Call The Law Office of Raymond E. Brown Today
Planning for your future is one of the most important things you can do for yourself and your family. If you’re interested in establishing a trust or beginning the estate planning process, speak to a Maryland bypass trust lawyer at The Law Office of Raymond E. Brown. We can help you explore your options and assist you in developing a comprehensive estate plan for you and your spouse.
Simply give us a call at (443) 554-9944 or contact us online to schedule a consultation with a member of our team today.
