Help Your Parents Bypass Estate Taxes

By Jeff Fleming
ThirdAge Money Expert

Question: My parents are in their late 80s and only have individual wills to each other. Mother has assets totaling about $500,000, and Dad over $1.6 million. They don't like trusts for the cost. I am afraid their estate will lose over 50 percent above the $675,000 deduction. What can I tell them to do immediately? I am thinking about a bypass trust first, after renewing their wills.

Answer: The bypass trust is a great first step in their planning. Generally speaking, here is how this technique works:

A trust is created in their will or under a separate trust agreement into which assets will flow upon the death of one of your parents. The trust will receive the largest amount of assets that can pass estate-tax free under federal tax law to someone other than your surviving parent.

This allows your deceased parent's estate to use the estate tax credit, which is currently equivalent to the tax on $675,000 worth of property. This amount will gradually increase over the next few years to $1 million, at which point a properly designed estate plan will allow the transfer of a total of $2 million without federal estate taxes.

One step that is often overlooked is how the trust will actually become funded. Here, you'll need to review how your parent's assets are titled. Savings or investments held in joint name will pass automatically to the survivor named on the account. Therefore, using an asset titled in this fashion poses some difficulties in funding the trust.

Assets such as annuities, life insurance or retirement plans pass directly to heirs named as beneficiaries, so beneficiary designations also need to be reviewed. It is important to note that retirement plans have additional complications due to possible income tax consequences of directing the assets to someone other than a spouse.

Undoubtedly, you should encourage your parents to meet with an estate planner. There are countless other planning solutions that may be appropriate for your parents including gifting and charitable planning.

The planner may also be able to address their fears that trusts are too costly. After all, a 55 percent estate tax is a very costly penalty for doing nothing!

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For more information on estate planning, see our Guide to Planning.