This takes the designated portion of the IRA or 401(k) proceeds out of the surviving spouse’s taxable estate and helps with asset distribution, according to the article “Estate Planning for Married Couples’ IRAs And 401(k)s” from Financial Advisor.

In 2013, the portability election became law. Portability allows the surviving spouse to use the unused federal estate tax exemption of the deceased spouse, thereby capturing not one but two estate tax exemptions. Why would a couple need a bypass trust?

The portability election does not remove appreciation in the value of the assets moved from the surviving spouse’s taxable estate. A bypass trust removes all appreciation. An estate planning attorney will review your entire situation to determine the optimal path.

There are also situations when the portability election does not apply. One is if the surviving spouse remarries and then the new spouse predeceases them. With a bypass trust, remarriage does not matter (although estate planning documents do need to be updated).

The portability election also does not apply for federal generation-skipping transfer tax purposes. In other words, the amount that could have passed to an estate and generation-skipping transfer tax-exempt bypass trust, including appreciated value, could now be subject to federal transfer tax in the heir’s estate.

If you use the portability election, those assets are subject to potential lawsuits against the surviving spouse and, if remarriage occurs, to any potential claims of a new spouse. A bypass trust provides better protection from lawsuits and claims.

Using the portability election may result in the first spouse to die losing the option to control where those assets go upon the death of the surviving spouse. A bypass trust provides more control for asset distribution.

The calculations for each situation must be considered, but the bypass trust can help reduce the taxable estate for children, after the surviving spouse has passed. It may also make sense for a portion of the IRA or 401(k) plan proceeds to go to the bypass trust and another portion to the surviving spouse outright. The use of the beneficiary designation may allow for a full or partial disclaimer by the surviving spouse. However, the bypass trust could provide more flexibility than keeping assets in the original accounts.

One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation.  Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security.  Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim. 

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Reference: Financial Advisor (Jan. 7, 2022) “Estate Planning for Married Couples’ IRAs And 401(k)s”