The question of whether you can fund a bypass trust – also known as a credit shelter trust or an A-B trust – with jointly owned property is a common one for estate planning attorneys in San Diego, and the answer is generally yes, but it requires careful planning and execution. Bypass trusts are designed to take advantage of the estate tax exemption, allowing assets to pass to beneficiaries without incurring estate taxes. Currently, the federal estate tax exemption is quite high – $13.61 million per individual in 2024 – but even with this high threshold, strategic estate planning remains crucial, particularly with rapidly changing tax laws. Utilizing jointly owned property as a funding source can be a powerful tool, however, it’s not always straightforward, and the implications must be fully understood.
What happens to jointly owned property after death?
Many couples own property as “joint tenants with right of survivorship.” This means that when one spouse dies, their share automatically passes to the surviving spouse, bypassing probate and estate taxes *at that time*. However, this can inadvertently increase the size of the surviving spouse’s estate, potentially pushing it over the estate tax exemption threshold. Funding a bypass trust with jointly owned property involves transferring ownership of a portion of that property *into* the trust while both spouses are still alive. This is a crucial distinction. The transfer is considered a gift, and depending on the value, may require filing a gift tax return, but it removes that portion of the property from both spouses’ taxable estates. According to the American Academy of Estate Planning Attorneys, approximately 5-7% of estates are large enough to potentially be subject to federal estate taxes, highlighting the importance of proactive planning for those with significant assets.
What are the potential tax implications of gifting joint property?
When you transfer jointly owned property into a bypass trust, you’re essentially making a gift. In 2024, the annual gift tax exclusion is $18,000 per recipient. This means you can gift up to this amount to any individual without needing to report it to the IRS. However, if the value of the property transferred exceeds this amount, you’ll need to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This doesn’t necessarily mean you’ll owe gift tax; it simply reports the gift and applies it towards your lifetime gift and estate tax exemption. It’s a bit like pre-paying your estate tax. We had a client, Mr. and Mrs. Abernathy, who owned a beach house valued at $850,000 as joint tenants. They wanted to maximize their estate tax benefits, but were hesitant to transfer the entire property. After careful planning, we were able to transfer a 50% interest – valued at $425,000 – into the bypass trust, utilizing their annual gift tax exclusion and applying the remainder to their lifetime exemption.
What went wrong for the Millers, and how did we fix it?
I recall working with the Millers, a lovely couple who owned a rental property as joint tenants. They attempted to transfer ownership of the property into a bypass trust *after* Mr. Miller’s passing, believing it was a simple matter of retitling the deed. Unfortunately, this proved to be a costly mistake. Because the transfer occurred after death, the property was considered part of Mr. Miller’s estate and subject to estate taxes. It was a classic example of trying to fix something *after* the fact, instead of proactive planning. The estate ended up paying tens of thousands of dollars in unnecessary taxes. This is why we emphasize the importance of funding trusts during your lifetime, while you still have control.
How can proactive planning with a bypass trust benefit my family?
Fortunately, we were able to help another client, the Hansons, avoid a similar fate. They came to us wanting to ensure their estate passed smoothly to their children. We worked with them to fund a bypass trust with a portion of their real estate holdings while they were both still alive and in good health. We also integrated the trust with their existing revocable living trust and updated their beneficiary designations. This ensured that their assets were properly protected and distributed according to their wishes. The Hansons experienced the peace of mind of knowing their family would be financially secure. Bypass trusts, when implemented correctly, can offer significant tax savings, protect assets from creditors, and provide for future generations. According to a recent study by Wealth Advisor magazine, approximately 60% of high-net-worth individuals have incorporated trusts into their estate plans, demonstrating the growing trend towards sophisticated estate planning strategies. It’s an investment in your family’s future that can yield substantial returns.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, an estate planning lawyer near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
estate planning attorney in San Diego
estate planning lawyer in San Diego
estate planning attorney in Ocean Beach
estate planning lawyer in Ocean Beach
About Point Loma Estate Planning:
Secure Your Legacy, Safeguard Your Loved Ones. Point Loma Estate Planning Law, APC.
Feeling overwhelmed by estate planning? You’re not alone. With 27 years of proven experience – crafting over 25,000 personalized plans and trusts – we transform complexity into clarity.
Our Areas of Focus:
Legacy Protection: (minimizing taxes, maximizing asset preservation).
Crafting Living Trusts: (administration and litigation).
Elder Care & Tax Strategy: Avoid family discord and costly errors.
Discover peace of mind with our compassionate guidance.
Claim your exclusive 30-minute consultation today!
If you have any questions about: Why is a will important for charitable giving?
OR
What is undue influence and how can it affect a will?
and or:
What strategies can be used to negotiate with creditors during estate planning?
Oh and please consider:
Why is understanding estate planning law crucial for effective debt settlement? Please Call or visit the address above. Thank you.