Tax Planning Advice: When Bypass Trusts Still Make Sense--Gavin Morrissey

A bypass trust is an estate planning tool used by married couples to pass down assets after death without subjecting them to the estate tax. In 2009, for example, when the estate tax exemption was $3.5 million, a deceased spouse's exemption could be allocated to a bypass trust, and any growth would be tax free to the beneficiaries upon the second spouse's death. Now with portability, Morrissey says, "all you have to do is file a return and say he or she takes the exemption."

But the matter does not end there. "I can put together cases where a bypass trust is still necessary," Morrissey says. One is control, which enables the decedent to ensure specific wishes are taken care of.

But perhaps more important are state tax laws. "People love to talk about this federal act, but they completely ignore the state," Morrissey says. He urges advisors to find out whether their clients are subject to estate taxes at the state level. For states with estate taxes, he says, he is unaware of any that provides portability of the estate tax exemption to the surviving spouse. The bypass trust can take advantage of the state's exemption amount.

He cites Massachusetts, where Commonwealth Financial Network is headquartered, as an example. Local tax law provides a $1 million exemption, but the top tax rate is 16%. "If you're worth $2 million, you should probably take advantage of that exemption on the first spouse's death."