Maryland residents who have used bypass trusts as part of a comprehensive estate plan should know that recent federal tax law changes can affect the manner in which these trusts are handled. Bypass trusts were originally established to allow marital assets to be passed to a spouse after the other spouse's death without having to go through probate and incur probate taxes. Then after the surviving spouse dies, the assets would be passed on to the children named as the remainder beneficiaries, once again bypassing estate taxes.
Tax law changes may now allow bypass trusts to be used to distribute income to beneficiaries in order to avoid higher taxes. For example, instead of naming only a spouse, a bypass trust can also specify a variety of other beneficiaries as well and make annual distributions only to those beneficiaries in the lowest tax brackets. Not only could the process be beneficial for heirs & beneficiaries, but it could be easier as well.
The new tax laws and their effect on capital gains may also have a bearing on the types of assets held in the trust as opposed to being held in the surviving spouse's name. As a result of these and other changes, it is important that the trust contain language allowing for maximum flexibility in its administration.
A person considering a bypass trust or similar type of document as part of an overall estate plan may wish to speak to an attorney with experience in estate planning and administration. Such an attorney may be able to explain the income and estate tax consequences of such a document as well as the tax effects of distributions to its beneficiaries.