What is a Bypass or Family Trust in Oklahoma Estate Planning

In Oklahoma, a bypass trust or family trust , sometimes called a credit shelter trust is an estate planning tool. This tool is designed to minimize federal estate taxes for married couples. It allows the first spouse to pass assets to a trust upon their death, taking advantage of their estate tax exemption, while preserving the remainder of the assets for the surviving spouse and other beneficiaries. Like other trusts its critical that its set up with great care to avoid losing the exemption.

Key Features of a Bypass or Family Trust

1. Purpose:
   • The primary goal is to reduce or eliminate federal estate taxes by fully utilizing the estate tax exemption of both spouses.
   • It helps protect family assets for future generations.
2. How It Works:
   • When the first spouse dies, assets equal to the federal estate tax exemption (currently $12.92 million per person in 2023, but subject to change) are placed into the Credit Shelter Trust.
   • These assets are not included in the surviving spouse’s taxable estate, ensuring they avoid estate taxes when the surviving spouse passes away.
3. Benefits for the Surviving Spouse:
   • The surviving spouse can benefit from the trust during their lifetime. They may receive income generated by the trust or, in some cases, access the principal under specific conditions (e.g., health, education, maintenance, or support).
   • The surviving spouse does not have full control over the trust assets, which helps protect them from creditors or mismanagement.
4. Tax Advantages:
   • Assets in the Credit Shelter Trust are not included in the surviving spouse’s estate for tax purposes.
   • If the assets in the trust grow in value, the appreciation also avoids estate taxes when the surviving spouse dies.
5. Remainder Beneficiaries:
   • Upon the surviving spouse’s death, the remaining trust assets typically pass to the couple’s children or other named beneficiaries without additional estate taxes.
6. Oklahoma-Specific Considerations:
   • While Oklahoma does not have a state estate tax (it was repealed in 2010), a Credit Shelter Trust is still useful for federal estate tax planning.
   • It can also be a valuable tool for protecting assets from creditors or ensuring specific inheritance distributions.

How’s It Work In Practice:

Suppose a married couple in Oklahoma has $20 million in combined assets. If its done correctly the Bypass or Family Trust works as follows:

• Upon the death of the first spouse, $12.92 million (the federal estate tax exemption for 2023) is placed in the Bypass or Family Trust in Oklahoma.
• The surviving spouse can use the income from the trust as needed. In some circumstances they may even be able to use the principal from the trust.
• When the second and surviving spouse dies, the remaining assets in the trust pass to the beneficiaries tax-free. This happens while at the same time passing that spouses estate tax free. This is true the remaining amount is now under the estate tax limit.

Do Potability Laws Impact The Need For A Bypass or Family Trust?

Portability laws as set out by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and was made permanent by the American Taxpayer Relief Act of 2012. The act allows the unused estate tax exemption of the first spouse to transfer to the surviving spouse. Some people may argue that couples no longer need a Bypass or Family Trust in Oklahoma. However, it remains a valuable tool in estate planning for the following reasons and more:

• Asset protection
• Controlling how assets are distributed after the surviving spouse’s death
• Preserving wealth for future generations

Get a Free Consultation With a Will and Trust Lawyer:

In Oklahoma, estate planning is never a one size fits all proposition. Depending on your personal circumstances and the goals its important to understand all the moving parts. This is particularly important when you have substantial assets to protect and need help sheltering them due to estate taxes. For a Free consultation contact the Tulsa will and trust attorneys at Kania Law Office 918.743.2233. Or if you link follow this link to ask an on line legal question.