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New laws governing bypass trusts

Florida taxpayers might be pleased to hear that new laws governing bypass trusts could end up proving beneficial to them when tax time rolls around. Bypass trusts can now serve as potential income tax savings tools in addition to their customary role in estate planning.

Bypass trusts have traditionally been used to make sure that a spouse's assets passed on to the other spouse after his or her death without having to go through the probate process, so that the assets would not be subject to estate taxes. After the death of the surviving spouse the trust assets would be distributed to the remainder beneficiaries also free of estate tax. New rules that allow grantors to name beneficiaries in addition to their spouses can now have favorable income tax effects.

Although people cannot earn money and then have their family members who are in the lowest tax brackets report it, bypass trusts are exceptions. The beneficiaries of trusts are the ones who must report the distributed income on their tax returns. If a bypass trust names other beneficiaries in addition to the surviving spouse, the distributions can be directed in a manner that saves taxes. Therefore, when trustees are determining the recipients of a bypass trust's annual distributions, they may want to select beneficiaries in the lowest income tax brackets.

Other changes to bypass trust rules may have an effect on investment decisions and powers of appointment that a trustee makes. A person seeking to establish a bypass trust as part of a comprehensive asset preservation plan may wish to speak to an attorney who has experience in estate planning. The attorney may be able to suggest trusts and other instruments that may help in minimizing income and estate taxes.

Source: Financial Planning, "New Flexibility for Bypass Trusts", Martin Shenkman, October 01, 2013

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