Are Bypass Trusts still worth it?

With the portability provision in the new tax law, a bypass trust for the sole purpose of preserving the federal estate tax exemption amount is unnecessary in most cases. However, there are other reasons for using bypass trusts, including:

1. You want to protect the inheritance from creditors. By leaving assets to heirs in a family trust rather than outright, you can protect against disgruntled spouses, creditors, and others who may sue your heirs.
2. Your spouse might remarry after your death. By keeping the assets in a bypass trust, you can prevent the evil stepmother or stepfather from cutting your children out. Another issue that arises upon remarriage is the forfeiture of the deceased spouse’s exemption. If Harry dies and his widow Sally remarries Joe, Sally cannot use Harry’s exemption amount if she also survives Joe.
3. Your spouse might strike it rich. By leaving assets in trust, you prevent the assets and any appreciation on the assets from being included in your spouse’s estate. You can reduce the likelihood that your spouse will own more than the exemption amount at death.
4. You may have grandchildren. Portability does not apply to the GST tax. You can apply your GST exemption to the bypass trust and include grandchildren as beneficiaries.
5. Your plan already includes a bypass trust. Don’t ditch your bypass trust just because of this new law. They still offer many benefits.
6. You live in a state that has an estate tax. Thirteen states and the District of Columbia currently have state estate taxes, and none have portability provisions.
7. You want to avoid administrative pitfalls. In order to use your deceased spouse’s exemption amount, the executor must file an estate tax return within 9 months of death, even if no estate tax is due.
8. You don’t trust Congress. Portability is set to expire on December 31, 2012. If Congress doesn’t act before then, we will no longer have portability, and the exemption amount will drop to $1 million with a 55% rate.

See Deborah L. Jacobs, Planning for a Disappearing Estate Tax Break, Forbes, Jan. 3, 2011