MP900442211Bypass trusts, also known as B trusts, are often used as a strategy to avoid estate tax. But because of recent changes in income tax and estate tax rates, families with B trusts should review their situation to ensure they’re not jeopardizing the financial stability of the surviving spouse and beneficiaries. While there are conditions when a B trust is appropriate, care must be taken to ensure that the B trust is tax efficient and will not trigger unwanted capital gains tax.

“If the surviving spouse attempts to use the deceased spouse’s one-half of the community property, it may trigger a variety of undesirable outcomes,” explains John Goralka in an article published in Private Wealth Magazine. “An existing B trust can be a ticking time bomb, detonating after the death of the surviving spouse.”

B trusts can create significant issues, including higher taxes during the surviving spouse’s life and higher capital gains taxes when assets are sold, without saving any estate tax. These types of trusts are typically irrevocable, but they can be modified during the surviving spouse’s life. Mr. Goralka advises that families with B trusts have two options. The best alternative is to obtain a court order to modify the trust. Another possibility to consider is to “decant” the trust by moving assets to create new, more desirable provisions. With either option, it’s essential that families move quickly to avoid substantially higher taxes.

Read full article published by Private Wealth Magazine.

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