TL;DR
The 2025 estate tax exemption reduction threatens to increase taxes on inherited wealth. Advanced trust strategies can help you save on estate taxes. A key tool is the bypass trust, also known as a credit shelter trust, which allows married couples to maximize both of their exemptions. This planning also considers the capital gains tax on inherited property by preserving the step-up in basis where possible. Exploring the tax benefits of a trust now is crucial for helping to protect your assets and promoting the efficient transfer of your legacy to your heirs before the law changes. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
How a Bypass Trust Can Help You Save on Estate Taxes
A major financial shift is on the horizon, and it could impact your family’s legacy more than you think. The federal estate tax exemption, the amount you can pass on to heirs tax-free, is scheduled to be cut roughly in half at the end of 2025. This means that without a proper strategy, a significant portion of your estate could be lost to taxes. For many Californians, this isn’t a distant problem; it is an urgent call to reevaluate their financial plans.
While many people associate trusts with avoiding the lengthy and public process of probate court, their true power often lies in sophisticated tax planning. The right kind of trust does more than just distribute assets. It can be a powerful tool to legally minimize what your estate owes the government, allowing you to save on estate taxes. Here are three ways trusts can help preserve your wealth for your loved ones. Results depend on individual circumstances. Prior results do not guarantee future outcomes.
Maximize Spousal Exemptions with a Bypass Trust
For married couples, one of the most effective tools is the bypass trust, also known as a credit shelter trust. This instrument is designed to maximize the use of both spouses’ estate tax exemptions. When the first spouse passes away, an amount up to their available exemption is placed into the bypass trust. The surviving spouse can receive income from this trust and, in some cases, access the principal for needs like health and education.
The key is that the assets in the bypass trust are not considered part of the surviving spouse’s estate upon their death. Therefore, those assets “bypass” a second round of estate taxes. This strategy allows a couple, in many cases, to use both of their individual exemptions, which can effectively double the amount they can pass to their heirs tax-free when planned properly. A strategy that seemed unnecessary when the exemption was over $13 million per person will become essential when it drops to around $7 million. For couples with a combined estate in this range, a credit shelter trust could be the single most important tool to save on estate taxes.
Navigating these complex financial waters requires careful guidance. To understand how the upcoming tax law changes might affect your family, contact Bay Legal PC for an advisory consultation. Discuss your options by calling (650) 668-800, emailing intake@baylegal.com, or using our online booking calendar to schedule an appointment. Our office is located at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States. We strive to provide clarity on these intricate matters.
Shield Life Insurance Proceeds with an ILIT
Another powerful strategy involves the Irrevocable Life Insurance Trust (ILIT). This trust is designed for one purpose: to own your life insurance policy. When you transfer ownership of your policy to an ILIT, the death benefit is generally not considered part of your taxable estate, provided certain conditions and timelines are met. This simple move can have a massive impact, especially for those with large policies.
By using an ILIT, the full death benefit can pass to your beneficiaries without being subject to federal estate taxes in most circumstances. This helps see that the funds you intended for your family’s security are not diminished by an estate tax bill.
This strategy provides liquidity for your heirs to pay any remaining estate costs without having to sell other assets, like a family home or business. The tax benefits of a trust like an ILIT are a cornerstone of many comprehensive estate plans.
Structuring a trust involves complex legal and financial foresight. Bay Legal PC advises on estate planning strategies and collaborates with your financial advisors for specialized needs. To learn more, call us at (650) 668-800, email intake@baylegal.com, or schedule an appointment via our booking calendar. You can visit us at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States to discuss how we can help you navigate your planning.
Preserve the ‘Step-Up in Basis’ to Reduce Capital Gains Tax
Beyond estate taxes, trusts are crucial for managing the capital gains tax on inherited property. When an heir inherits an asset, its value is typically “stepped up” to the market value at the time of death. This means the heir could sell it immediately without owing any capital gains tax. Many people worry that trusts will negate this valuable benefit.
However, certain types of trusts, particularly revocable living trusts, preserve this step-up in basis. By holding appreciating assets like real estate or stock portfolios in a revocable trust, you can avoid probate while helping your heirs receive a full step-up.
This is a critical element in planning, as it directly impacts the net inheritance your beneficiaries receive. It’s a key consideration when discussing the tax benefits of a trust, as poor planning can lead to unforeseen tax costs for your heirs.
As 2025 approaches, the window of opportunity to take advantage of the current high estate tax exemption is closing. Taking proactive steps now can make a monumental difference in the future. The strategies you implement today could shield your estate from significant tax burdens tomorrow, but the clock is ticking. With the tax landscape shifting so dramatically, the real question is not whether you need a strategy, but whether the one you currently have will still be effective when it matters most.
The approaching 2025 deadline creates a narrow window to act. To ensure your estate plan is updated to address these changes, contact Bay Legal PC. Discuss how we can help by calling (650) 668-800, emailing intake@baylegal.com, or using our booking calendar to schedule a consultation. Our office is at 667 Lytton Ave, Suite 3, Palo Alto, CA 94301, United States. We work to help clients protect their assets for the future.
Frequently Asked Questions (FAQs)
1. How can I save on estate taxes with a trust?
By transferring assets into a properly structured irrevocable trust, you can often remove them from your taxable estate. A bypass trust, for example, uses both spouses’ exemptions to significantly lower the final tax bill, offering a powerful way to preserve your wealth for heirs. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
2. What is a bypass trust?
A bypass trust, or credit shelter trust, is an irrevocable trust used by married couples. It holds assets up to the deceased spouse’s exemption amount, providing for the survivor while ensuring those assets are not taxed again in the survivor’s estate. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
3. Will my heirs pay capital gains tax on inherited property held in a trust?
It depends on the trust type. Assets in a revocable trust typically receive a “step-up” in basis, which can eliminate the capital gains tax on inherited property if sold immediately. Irrevocable trusts have different rules, making professional advice essential. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
4. What are the main tax benefits of a trust?
The primary tax benefits of a trust include reducing your taxable estate to save on estate taxes, providing a degree of asset protection from potential creditors, and potentially minimizing the capital gains tax on inherited property for your beneficiaries through careful planning. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
5. Why is a credit shelter trust important now?
With the estate tax exemption set to decrease in 2025, a credit shelter trust is crucial. It allows you to utilize the current, higher exemption amount for the first spouse to die, which can preserve this valuable tax-saving tool even if the exemption amount later decreases. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
6. Can a trust help with more than just estate taxes?
Yes. Besides helping you save on estate taxes, trusts offer benefits like probate avoidance, privacy, asset protection from creditors, and controlled distribution of assets to beneficiaries over time, promoting responsible wealth management for the next generation. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
7. How does a bypass trust work for a married couple?
Upon the first death, assets fund the bypass trust. The surviving spouse can benefit from the trust, but the assets are not in their estate. This strategy utilizes both tax exemptions, which is a key way to save on estate taxes. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
8. Does a bypass trust avoid capital gains tax on inherited property?
Assets in a bypass trust do not get a second step-up in basis upon the surviving spouse’s death. This is a trade-off for significant estate tax savings, and it’s a key point to discuss when structuring your estate plan. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
9. What are the overall tax benefits of a trust for my children?
The tax benefits of a trust for heirs are significant. They can receive a larger inheritance due to reduced estate taxes and a minimized capital gains tax on inherited property, helping see that the wealth you built is preserved as much as possible. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
10. Is a credit shelter trust the only way to save on estate taxes?
While a credit shelter trust is a highly effective tool, other strategies like gifting, charitable trusts, and life insurance trusts also exist. The best approach depends on your specific financial situation and goals for your estate. Prior results do not guarantee a similar outcome. Each client’s circumstances are unique.
Attorney Advertising Disclaimer
This website and its contents are for informational purposes only and do not constitute legal advice. Prior results do not guarantee a similar outcome. Every estate planning matter is unique and depends on specific circumstances and applicable law. Viewing this site or contacting Bay Legal, PC does not create an attorney–client relationship. If you need legal advice, please schedule a consultation with a licensed attorney.