Forums Support Library ECPL – Estate & Charitable Planner LIVE Bypass Trust Computation

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    • Kathleen Reynolds
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      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.

      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 2011, the unified credit exclusion amount is $5,000,000, and the tax rate is 35%, for both gift tax and estate tax purpose. The $5,000,000 exclusion amount is indexed for inflation after 2011, is $5,120,000 for 2012, $5,250,000 for 2013, $5,340,000 for 2014, $5,430,000 for 2015, $5,450,000 for 2016, $5,490,000 for 2017, $11,180,000 for 2018, $11,400,000 for 2019, $11,580,000 for 2020, $11,700,000 for 2021, $12,060,000 for 2022, and $12,920,000 for 2023. Future years (2024 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 amount” (DSUEA) 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 DSUEA, and (b) the possible reduction in the DSUEA by adjusted taxable gifts on which gift tax was paid.

      In order to create the largest possible bypass trust at the first death, and so get the greatest benefit from the decedent’s unified credit, there must be assets in the decedent’s estate (or revocable trust) sufficient to use up all of the decedent’s unified credit. Assets that are jointly owned will pass outside of the will or revocable trust and cannot be used to fund the bypass trust. Life insurance or retirement benefits payable to a named beneficiary will also pass outside of the will or revocable trust (and outside of the bypass trust). And if one spouse has a large estate and the other a small estate (or no separate estate at all), the benefit of the unified credit can be lost if the spouse with the smaller estate dies first. Finally, some assets may not be suitable for a bypass trust. For example, death benefits from a qualified plan or individual retirement account can be rolled over by a surviving spouse, and the income tax deferred on those benefits, but the income tax might have to be paid prematurely, with a greater income tax cost, if the benefits are payable to the bypass trust. Therefore, although the program assumes that a bypass trust can be fully funded at the first death, careful planning may be needed to be certain that there are in fact appropriate assets in the estate to fund the bypass trust at the first death.

      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, but assumes that the surviving spouse is not allowed a credit for the unused exclusion at the first death.

      Bypass Inputs Screenshot

      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.

      Bypass Trust Results Screenshot

      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 amount” (DSUEA) if the first death is after 2010. The DSUEA 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.

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