How a Marital Bypass Trust May Save Thousands in Taxes

Dhaval and Radha's attorney warned them to protect their $5 million estate with a marital bypass trust.

"What's a marital bypass trust?" Radha asked during their first visit to his office.

"It's the same as a credit shelter trust or an A-B Trust."

"Yes, but what is it and what does it do?"

"Look at Dhaval," the attorney said gesturing toward her husband. "Imagine him carrying a sack marked '$2 million' over his shoulder. Dhaval dies. Not only he passes from this life, but so does that $2 million, unless you have a marital bypass trust."

"But I thought on the death of the first spouse the surviving spouse got everything," Dhaval said. "That's true," the attorney answered. "And if the surviving spouse is a US citizen, he or she gets everything free of federal estate tax. But that $2 million is not $2 million in cash or property; it's a $2 million exclusion from estate tax."

"But why do we need estate tax protection if everything passes to the surviving spouse tax-free?" Radha asked, wondering now why all this was so complicated.

"Because the day of reckoning has only been postponed, not eliminated," the attorney explained.

"On the death of the second spouse, the estate becomes vulnerable to estate tax. Without a marital bypass trust, you will have lost one-half of the estate tax protection you have as a married couple."

"So what should we do?" Dhaval asked. He had begun to tally in his mind the tax on $2 million of their estate that could be transferred tax-free.

"Here's what I propose," the attorney offered, looking up from his yellow legal pad where he had roughed out the $800,000-plus tax savings a marital bypass trust would provide. "I'll write your estate plan so that the surviving spouse may either take the entire estate directly or choose to place part of the estate into a marital bypass trust. The choice will be yours, and you can make it depending on the size of your estate at that time and the current laws."

"Since I have coronary artery disease, the bypass trust will be well named," Dhaval quipped.

"Yes," the attorney mumbled with a weak smile.

For more information on Gift Planning, visit the Hindu Heritage Endowment website at www.hheonline.org.