The Real Attraction of Bypass Trusts

• Author: Jerold I. Horn
• Profession: Lawyer
• Pages: 7-11

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The tax advisability of using bypass-type trusts to shelter exempt transfers of a property

owner from estate tax and generation-skipping tax is a function of the likelihood that

the addition of the transfers to the transfers of a beneciary will cause the transfers of

the beneciary to exceed the exemptions of the beneciary.

The tax environment remains unsettled and unstable. An unstable environment poses

a tax risk to those who fail to shelter exemptions (including those of a possibly tem-

porary repeal) by means of bypass-type trusts to such extent (if any) as is necessary to

immunize assets from estate tax, gift tax, and generation-skipping tax. If, as the writer

argues below, the costs of a shelter trust are relatively small compared with the tax

savings that a shelter trust might provide, an owner of wealth that, according to any rea-

sonably likely scenario, can generate liability for transfer tax should consider indulging

the conservative assumption that the addition of any of the estate of the owner to the

estate of a beneciary might generate transfer tax at the level of the generation of the

beneciary. Nevertheless, the estate planner must recognize that many owners of prop-

erty are extremely adverse to complexity and gladly will surrender some savings of tax

in exchange for reduced costs (in terms not only of money but also time and well-being)

of administration and increased understanding.

The property owner must weigh the advantages of a bypass-type trust against the dis-

advantages. Although the thesis of the writer is that the advantages are relatively large

and the disadvantages are relatively small, at least a signicant number would disagree.

A typical client for whom the writer drafts multigenerational trusts is an individual

who, absent his or her dialogue with the writer, probably would choose not to use a

shelter-type trust at all. Rather, upon his or her death, the client would leave his or her

estate outright to his or her surviving spouse and, upon the death of the survivor of

the client and the spouse, would leave his or her estate outright to his or her surviving

descendants, per stirpes, subject to provision of management until one or more stated

ages at which the primary beneciary could manage for himself or herself.

Most of the bypass-type trusts that the writer creates are intended to confer upon the

primary beneciary powers and interests that, as a functional matter, approach those of

outright ownership but do not attract tax burdens of ownership. The trust is designed, to

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The Real Attraction of Bypass Trusts