When you die in California, your assets can only go to three places: your beneficiaries, charity organizations or the government. If you don’t manage your assets accordingly while alive, the government will take the greatest share, leaving very little for the people you love. One way to avoid this is through exempt trusts. Here’s what you need to know about them.
What is an exempt trust?
An exempt trust, also known as a bypass trust or an AB trust, is an estate planning tool that allows married couples in California to reduce or avoid estate taxes on some of their assets. It does this by splitting them into two separate trusts: the “A” marital trust and the “B” family trust, commonly referred to as the bypass.
How does exempt trust work in California
Your surviving spouse will be the owner of the marital trust after you die. They’ll be able to make any changes they want with it since it will be revocable. On the other hand, the bypass, meant for your children and other beneficiaries, will be irrevocable, meaning no one will have the right to change anything you stipulated on the trust, including the surviving spouse.
What are the tax advantages of an exempt trust?
When someone dies in California, marital assets will go to the surviving spouse free of state and federal estate taxes. However, if the value of the trust exceeds the state or federal limits, the IRS will tax it. Additionally, since the surviving spouse is not the grantor or trustee of the bypass, they will not pay any taxes on it.
If you want to make sure that your beneficiaries will get their inheritance without affecting your spouse’s assets, an exempt trust may be the best option for you. It prevents your estate from going through probate, which is an expensive and long process.