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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience:  Taxes, Immigration, Labor Relations
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We have a will with a bypass trust set up, and I see no problem

Resolved Question:

We have a will with a bypass trust set up, and I see no problem should I die first. But what happens if my wife dies first as her assets appears to be worth only $850k.

I have $3400K in an IRA, $1700k in a ROTH, plus I would have about $450k after her death.

If I die two months later, will there be Estate taxes due? If so, what can I do to avoid them.
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to our site!
In case of the bypass trust - there is NO difference who dies first.
I hope you both will live long enough
The main purpose of the bypass trust is to utilize unlimited spousal estate tax exclusion and ensure that property will not be subject to estate taxes when the second spouse dies.
It doesn't matter if you die two months later your spouse as your spouse's part of the bypass trust becomes irrevocable on the day she dies. The only matter which spouse dies first.

Lev :

Without using a bypass trust - all assets will be included into the estate of a second spouse, by with the bypass trust - the second spouse still may use inherited assets but will not include these assets into his/her estate.
Please be aware that in case when an IRA account is part of your estate - and you want the trust to be a beneficiary - there will be certain distribution rules.
If your spouse is a beneficiary of your IRA account - she generally may treat that account as her own. That might be especially helpful in case of Roth IRA because there is no RMD - and if you die first - she will be able to maintain deferral status in that account as long as she is alive.
So - you might want to plan carefully - and might want to leave some of your assets outside the trust.

Customer:

I understand the reason for the bypass trust and I understand the RMD of regular IRA's vs ROTH IRA's> My question concerns more about how the bypass trust is funded. In the case where she dies, I can see only $850k as available for funding the bypass trust, as that would be her net worth at her death. That would still leave me with an IRA worth $3400 and a ROTH worth $1700k and another $450k which results from the division of our joint assets. That totals to $5550k,

Customer:

Hit RETURN and it ;sent reply before I was finished. Please explain how the bypass trust is funded at her death.

Lev :

Yes - that is correct. If her assets are $850k - that is the maximum she may use to fund the trust.
You may gift her some of your assets - there is no gift tax consequences for gifting to the spouse who is an US citizen. However assets in your IRA accounts may not be gifted or transferred to your spouse without prior distribution.

Lev :

When we are talking about funding the trust - this refers to actual transferring assets that are titled in the individual or in joint names and changing the title to the name of the Trust.
In case of the IRA account that may not be re-titled - you name the trust as a beneficiary - so assets will be transferred upon your death.

Lev :

Similar - if you have a life insurance - and want it to go to the trust - you name the trust as a beneficiary of your insurance policy.

Customer:

If I understand this correctly, then I could gift her some or all my assets outside the IRA's and take distributions from either IRA and gift that as well. Is there a minimum time before her death that the IRS requires before it's considered gifted?

Lev :

Yes - that is correct. However assets distributed from regular IRA account would be taxable for you upon distribution - and you will not longer able to maintain tax deferral status on income generated from these assets.
For estate tax purposes gifts made within a year of the death are included into the taxable estate.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
Lev and 2 other Tax Specialists are ready to help you

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