Overview

Main Menu Name: Bypass

Illustrates the benefit of the bypass trust by calculating the federal and state death taxes that would be payable at the second death, if the first spouse to die were to leave his or her entire estate to the survivor ,so that the combined assets of the husband and wife were all taxable at the death of the survivor, and calculating the federal and state death taxes that would be payable at the second death if, at the first death, an amount equal to the unified credit applicable exclusion amount were removed from the taxable estates through a bypass trust. The difference in tax is the savings from the bypass trust.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This calculation computes the estate tax saving that is possible when the unified credits of both husband and wife are used to reduce the estate tax otherwise payable when they have both died.

Getting Started

The federal estate tax applies to the net estate of a decedent at death, but each person is allowed a unified credit which provides an exclusion from tax. For the year 2024, the basic exclusion amount is $13,610,000 and the tax rate is 40% for gifts and taxable estates that exceed that amount. 

Future years (2025 and later) are estimates based on the Inflation Rate for Exclusion input.

An effective estate planning technique to use both unified credits is to change the wills or revocable trusts of the married couple so that, on the first death, the unified credit exclusion amount does not pass to the surviving spouse but is held in a trust for the benefit of the surviving spouse. In this way, the surviving spouse can get the income and benefit of the property held in the trust without the property being part of the survivor's estate. Upon the death of the surviving spouse, the property in the trust passes to (or in further trust for) the children or other intended beneficiaries free of tax. This kind of trust is sometimes called a "bypass" trust, because the property in it "bypasses" the estate of the surviving spouse.

The estate tax calculations take into account the changes in rates and credits provided by the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, including the "deceased spousal unused exclusion"(DSUE) that the surviving spouse may receive after the first death and which is intended to allow the estate of the surviving spouse to claim the benefit of the unified credits of both spouses without the use of a bypass trust. The bypass trust may still result in lower taxes at the second death due to (a) growth in the value of assets after the first death which can be excluded from the estate of the surviving spouse through the bypass trust but not through the use of the DSUE, and (b) the possible reduction in the DSUE by adjusted taxable gifts on which gift tax was paid.

Entering Data

1. Net Value of Combined Assets of Both Spouses:  Enter the total value of the combined estates of the husband and wife. Be sure to include all assets that are included in the gross estate for federal estate tax purposes, including jointly owned property, life insurance, and retirement plans. (However, as noted in the main help file for this calculation, those assets might not be available or appropriate to fund a bypass trust.) Enter all values net of debts and estimated estate settlement expenses, as well as any charitable deduction that may be claimed at the second death.
   
   
2. Estate Tax Calculations:  In 2010, the user can select the 35% rate or No Estate Tax.
   
   
3. Growth Rate after First Death:  Enter a rate of capital appreciation to apply to the assets of the bypass trust and the assets of the surviving spouse after the first death.
   
   
4. Inflation Rate for Exclusion:  Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
   
   
5. Year of Death:  Enter the expected or projected year of death for both the first and second death. Valid year inputs are 1997 or later.
   
   
6. Adjusted Taxable Gifts:  Enter the amounts of any adjusted taxable gifts (i.e., taxable gifts after 1976) made by either the first spouse to die or the second spouse to die.
   
   
7. Gift Tax Paid on Adjusted Taxable Gifts:  Enter the amounts of any gift tax payable (i.e., the tax on gifts in excess of the applicable exclusion) on the adjusted taxable gifts using the tax rates in effect at death. (See the "Prior Gifts" screen for help with this calculation.) So, for example, gifts in excess of $1,000,000 that were made before 2011 would result in gift tax payable at 35% for deaths in 2011 or 2012.
   
   
8. Sunset in 2026?: Selects how future estate tax calculations will be handled.

Results

The calculations are displayed in two columns, one showing the consequences of a bypass trust created at the first death to use the unified credit of the first to die, and one showing the entire combined estates passing to the survivor.

The amount passing to the bypass trust at the first death is calculated by taking the applicable exclusion amount for that year and deducting the amount of any adjusted taxable gifts entered other than gifts which resulted in the payment of gift tax.

For the bypass trust column, the survivor's taxable estate is the net value of the combined estates entered, less the amount passing into the bypass trust at the first death. For the "all to spouse" column, the survivor's taxable estate is the entire net value of the combined estates entered. In both columns, the growth rate that was entered is compounded annually to increase the surviving spouse's estate (and the bypass trust) from the first death to the second death.

The estate tax for the survivor's estate is calculated using the exclusion amount for the year of the second death (including any inflation adjustments after 2011) and, in the "All to Spouse" column, the "deceased spousal unused exclusion" (DSUE) if the first death is after 2010. The DSUE is the exclusion amount at the first death, less the amount of any adjusted taxable gifts entered for the first death including gifts which resulted in the payment of gift tax. In both columns, the adjusted taxable gifts are added to the taxable estate and the tentative tax on that sum is reduced by both the amount entered for the gift tax paid and the credit amount based on the applicable exclusion.

For simplicity, not all possible credits are calculated in the calculation' results. The purpose of this calculation is to produce a quick estimate of the potential federal estate tax.

The amount of the taxes saved by the bypass trust is the difference between the total federal and state estate taxes in the two columns.

Although the DSUEA was enacted in order to allow the estate of the surviving spouse to have the benefit of the unified credits of both spouses without the use of a bypass trust, the bypass trust may still result in lower taxes at the second death due to (a) growth in the value of assets after the first death which can be excluded from the estate of the surviving spouse through the bypass trust but not through the use of the DSUEA, and (b) the possible reduction in the DSUEA by adjusted taxable gifts on which gift tax was paid.