Can a bypass trust hold real estate?

Yes, a bypass trust, also known as a credit shelter trust or a B trust, can absolutely hold real estate. This is a common and effective estate planning strategy for married couples, particularly when aiming to maximize the use of federal estate tax exemptions and minimize potential estate taxes. The purpose of a bypass trust is to utilize the deceased spouse’s federal estate tax exemption amount, shielding those assets from estate taxes and allowing them to grow outside of the surviving spouse’s estate.

What are the Benefits of Putting Real Estate in a Bypass Trust?

For many, their home or other real estate holdings represent a significant portion of their net worth. Placing these assets within a bypass trust provides several key advantages. First, it removes the property from the surviving spouse’s estate, preventing it from being subject to estate taxes upon their death. Since federal estate tax laws are subject to change, utilizing this exemption now can provide significant long-term savings. Currently, the federal estate tax exemption is quite high (over $13 million per individual in 2024), but planning for potential reductions is wise. Furthermore, the property’s appreciation within the trust isn’t included in the surviving spouse’s taxable estate, creating a tax-advantaged growth environment. In California, even though there’s no state estate tax, utilizing a bypass trust avoids potential future federal estate tax implications.

How Does a Bypass Trust Work with Real Estate?

When the first spouse passes away, the real estate (and other assets) up to the estate tax exemption amount are transferred into the bypass trust. The surviving spouse typically serves as the trustee and beneficiary, allowing them to continue living in the home and managing the property as they did before. However, ownership has legally shifted to the trust. This is a crucial distinction because upon the surviving spouse’s death, the assets within the bypass trust are distributed to the beneficiaries (often children or other heirs) without incurring estate taxes. Assets held outside of the trust (and exceeding the exemption amount) *would* be subject to estate tax. It’s vital that the trust document clearly outlines how the property is to be managed, sold, or distributed, aligning with the couple’s wishes.

What Happens If I Don’t Use a Bypass Trust?

Without a bypass trust, all assets, including real estate, would be included in the surviving spouse’s estate. While the current high exemption amount might not necessitate this planning for everyone, it’s a proactive measure. Consider this scenario: A couple, the Millers, owned a home valued at $800,000, along with other assets totaling $2 million. Without a bypass trust, upon the first spouse’s death, those assets would combine in the surviving spouse’s estate. If the exemption amount were to decrease significantly, a substantial portion of their estate could be subject to federal estate taxes. However, if they had utilized a bypass trust to shelter the $800,000 home and other assets up to the exemption limit, those funds would have grown tax-free and passed to their heirs without tax implications.

Community Property and the “Double Step-Up” in Basis

In California, as a community property state, assets acquired during marriage are owned equally by both spouses. This offers a significant tax benefit known as the “double step-up” in basis. Upon the death of the first spouse, the community property receives a step-up in basis to the fair market value at the date of death. This means that when the surviving spouse eventually sells the property, they only pay capital gains tax on the appreciation *after* the date of death. The “double step-up” occurs because both spouses receive this benefit upon their respective deaths. A bypass trust, when properly structured with community property considerations, can further enhance these tax benefits. It’s important to consult with a qualified estate planning attorney to tailor the trust to your specific circumstances.

Steven F. Bliss ESQ. can help you determine if a bypass trust is right for your needs. He can walk you through the process of establishing a trust that aligns with your financial goals and family dynamics. With over 20 years of experience, he has guided countless families through the complexities of estate planning. Don’t leave your legacy to chance.

Don’t delay, schedule a consultation today with Steven F. Bliss ESQ. at (951) 412-2800. Protect your family, minimize taxes, and ensure your wishes are honored. Your peace of mind is worth it!