But, funding highly appreciating assets into a
bypass trust can cause a lost opportunity for receiving a step-up in basis at the second death without the benefit of saving any estate tax.
Because all future growth in that trust is outside of a taxable estate, the trustee often advises the income beneficiary/ surviving spouse to spend down his taxable estate before taking distributions from the
bypass trust. Many advisors would counsel against the trust paying extra trust tax preparation fees, and possibly administration and management fees, if it is merely reinvesting the growth into the surviving spouse's taxable estate.
(8) In its simplest form, portability involves the DS leaving all of his or her assets outright to his or her SS (or to a marital deduction trust for the benefit of the SS), eliminating the need for a
bypass trust (i.e., a trust established for the benefit of a SS that will not be included in the SS's estate for estate tax purposes) (basic portability plan).9 Although the main rationale for enacting portability was to simplify estate planning, portability places a greater significance on the facts and circumstances of each particular client, requiring practitioners to take a much more calculated approach to planning.
Considerable IHT savings can be made using a spousal
bypass trust.
However, accumulated income and future appreciation within a
bypass trust will be excluded from the gross estate upon the death of the second spouse;
THE ADVICE: Consider setting up a
bypass trust. The Vinsons need to give some thought as to how to distribute their estate.