Editor’s Note: Jennifer Joyner Dacey is a member of the Trusts and Estates Practice Group at Ward and Smith, P.A.

Over the last few years, the federal estate tax exemption amount has been all over the map, making the prospect of estate planning daunting for lay folks and estate planners alike. As a result of the estate tax overhaul President Obama signed into law last December, the air has finally cleared – albeit only for a little while.

Just as under the old regime, you can leave your spouse or a charity as much as you like without paying any estate tax. However, the new law makes two significant changes. First, it increases each person’s lifetime exemption from federal estate and gift tax for transfers to persons other than a spouse to $5 million (up from $3.5 million in 2009 and $2 million in 2008). Second, it makes this exemption “portable” between spouses. This means that the surviving spouse of a person dying in 2011 or 2012 can add the unused exemption amount of the first spouse to die to the surviving spouse’s estate tax exemption. This change, taken together with the increased exemption amount, allows married couples to transfer up to $10 million tax-free to their children or other heirs, either through their estate or through lifetime gifts.

A Disappearing Estate Tax Break?

Portability is nice, but certainly not a panacea. While it may ultimately simplify estate planning if it becomes a permanent fixture of the tax code, its fate is far from certain. Without action by Congress, not only will portability disappear at the end of 2012, but the exemption amount will return to $1 million and the maximum estate tax rate will increase to 55% from the current rate of 35%. So, relying on increased exemptions and portability as planning tools could be costly if they do not stand the test of time. In the meantime, portability raises some difficult questions about how complex and flexible your estate plan should be to accommodate future changes in the estate tax law and your net worth.

Until portability becomes permanent (to the extent anything in the tax laws can be), it may be most useful to the estates of decedents who did not really plan at all! For instance, if a 2011 decedent with an $8 million estate wrote his own will leaving all of his assets to his wife, portability could mean that absolutely no taxes would be owed by either estate, assuming his wife dies before 2013. Since none of his $5 million exemption was used because he left all of his estate to his wife, his wife would be able to simply add her deceased husband’s unused $5 million exemption amount to her $5 million amount, for a total exemption amount of $10 million at her death. There are two catches, however. First, in order for the wife to take advantage of portability, the husband’s executor must have timely filed an estate tax return, even though no tax was due. Second, if the wife remarries and her new spouse predeceases her, she cannot use her previous husband’s unused exemption amount.

Bypass Trusts – Relics of a Bygone Era? Not So Much!

Now that portability (at least for a little while) allows spouses to share their unused exemption amounts, you might think that the use of a family trust or bypass trust has become a thing of the past as a means of estate tax avoidance. In some circumstances though, there are still plenty of reasons to utilize them. Many affluent married couples already have estate plans that provide for such trusts.

Bypass trusts are designed to maximize and preserve the tax exemption of the first spouse to die without leaving the surviving spouse short on assets or income upon which to live. When the first spouse dies, the trust is funded up to that spouse’s maximum exemption amount and distributions of income and principal are allowed to be made to the surviving spouse (and sometimes children) while the surviving spouse is alive. Once the surviving spouse dies, the assets of the trust pass to the remaining family members or others benefited by the trust. The trust assets are sheltered from estate tax by the use of the exemption amount of the first spouse to die and are not considered part of the surviving spouse’s estate either, thereby bypassing his or her estate.

Depending on your age, your net worth, your investment outlook, and your family dynamics, a bypass trust may still be the best way to go because of all the potential benefits such a trust affords. A bypass trust may be advisable for the following reasons:

• It removes the uncertainty of relying on portability and increased exemption amounts in your estate plan.

• If your heirs are entrepreneurs or professionals whose work or lifestyle could increase the chances of them becoming the target of a lawsuit, a bypass trust is an excellent means of sheltering your family assets from their creditors.

• If you have children from a previous marriage for whom you want to provide, a bypass trust ensures that those kids are not disinherited by your subsequent spouse.

• If you are concerned that your spouse might remarry after your death, a bypass trust prevents your surviving spouse from using your funds to support the new spouse.

• If you are concerned about the costs of long-term care, a bypass trust can be designed to protect your family’s assets from the costs of care for your surviving spouse.

• Portability does not apply to the generation-skipping transfer (“GST”) tax – the extra 35% tax that applies (on top of gift or estate tax) to gifts to your grandchildren. If you have grandchildren or think you might someday, a bypass trust provides a means for you to make tax-free gifts to those grandchildren.

If you think your will or living trust contains a bypass trust, it may be time to consult your attorney about whether changes might be necessary. You can skim your documents for phrases like “that fraction,” “that portion,” or “that amount,” which indicate that they were drafted with the intent that the available exemption amount for such a trust was fully funded. If you already have an estate plan that contains bypass trust planning, you should consider a thorough review to see if amendments might be necessary. Because there has been so much change in the estate tax exemption over the last 15 years, you may need to adjust your plan to be sure it still accomplishes your goals.


While portability of personal exemptions may simplify estate planning for some and may ultimately mean that fewer married couples will need a bypass trust to avoid unnecessary taxes than in the past, a simple “I love you” will leaving everything to your spouse is inadequate estate planning in most every situation. Depending upon your tolerance for risk and complexity, your net worth, and your family situation, a bypass trust may still be a desirable component of your estate plan for nontax reasons.

© 2011, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Jennifer Joyner Dacey practices in the firm’s Trusts and Estates Practice Group where she focuses primarily on estate planning. Comments or questions may be sent to her at jjd@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of legal counsel.