The bypass trust is a popular estate planning strategy used to reduce a couple's exposure to estate taxes by leaving assets not to the surviving spouse, but to a trust for his/her benefit instead. If the surviving spouse doesn’t inherit the assets directly, he/she is not subject to future estate taxes when the other spouse ultimately passes away.
However, while the bypass trust is effective for saving on estate taxes, it’s not very favorable for income tax planning, given that trusts reach a top 39.6% tax bracket — plus the 3.8% Medicare surtax on net investment income — beginning at just $12,400 of taxable income. And at that threshold, long-term capital gains, as well as qualified dividends, are subject to a whopping 20% + 3.8% = 23.8% tax rate as well. And that’s before applicable state income taxes.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access