Albuquerque Bypass Trust Lawyer

A bypass trust provides a unique way to avoid triggering estate taxes or generation-skipping transfer taxes after one spouse dies. It can also protect estates from creditor claims while reserving assets for specific beneficiaries.

In this arrangement, all (or most) of the deceased spouse’s assets are held in an irrevocable trust, which is promised to the couple’s children (or any other beneficiaries they choose). The surviving spouse is able to draw income from the trust, but otherwise, the principal and appreciated value of trust assets lie mostly untouched until the surviving spouse also passes on. Then, the remainder of the trust is inherited by the intended beneficiaries.

Since the introduction of estate tax exemption portability for spouses and the massive increase in exemption amounts — both of which occurred with the passing of the Tax Cuts and Jobs Act of 2017 — bypass trusts have seen less use in recent years. Nevertheless, they provide some concrete advantages and strengths, especially for blended families or surviving spouses who may decide to remarry.

New Mexico Financial & Family Law can provide you with an Albuquerque bypass trust lawyer to discuss your options for creating such a trust, setting aside a sizeable trove for the sake of your family’s financial future. Call our offices at 505-503-1637 or contact us online to schedule a no-obligation appointment and learn more about how a bypass trust might be beneficial to you.

Questions to Consider Before Meeting With Your Albuquerque Bypass Trust Attorney

A bypass trust creates a rather complicated ownership scheme for marital assets, but the benefits offered by one can make the effort needed to create one well worth it.

However, a bypass trust may not be the ideal solution for everyone. To ensure that your trust provides the benefits you intend to obtain with minimal drawbacks, you will need to consider carefully how you want to arrange the trust.

The trust you create should be capable of reflecting your long-term investment and inheritance goals for your family. Accordingly, you will want to consider how you might answer the following questions when you meet with your Albuquerque bypass trust attorney:

• How much of your marital estate do you plan on placing in a bypass trust? Keep in mind that New Mexico is a community property state, so a spouse would only technically be allowed to deposit their separate property into a separate trust. For communal property, the spouse would need permission from their other spouse to deed community property at all, including into a trust.
• How much income do you intend to distribute to the surviving spouse from the bypass trust?
• Who do you want to name as beneficiaries, who would receive the trust’s final assets when the surviving spouse dies?
• Do you want to allow for the surviving spouse to access the trust as necessary for specific allowable reasons, such as for repairs to their primary residence or for life-saving health care?
• Do you want to reserve some of the trust’s value for grandchildren and other younger beneficiaries, so as to take maximum advantage of any available generation-skipping transfer tax exemption?
• How much would you want to limit the surviving spouse’s ability to make modifications to the trust, which is known as their “powers of appointment”?
• Do you want some of the trust’s value to go to a charitable cause by creating a bypass charitable remainder trust?
• What instructions do you want to provide to the trustee (who could be the surviving spouse) to govern the management of trust assets and investments?
• How might the bypass trust fit within your larger estate plan? Answering this question is critical since the trust will likely be used to house most or all of the assets that would otherwise enter into your estate.

When you meet with an Albuquerque bypass trust attorney at New Mexico Financial & Family Law, they can help you think through all of these questions, along with any others pertinent to your overall estate planning strategy. Our objective is to give you and your family peace of mind, with a comprehensive estate plan capable of accomplishing all of your goals — for this life, and the next.

How Does a Bypass Trust Work?

A bypass trust is a special type of trust that must be formed in advance of the death of the trust creator (called a “grantor”).

Usually, joint marital assets are placed in a single trust, which is referred to as an “A-B trust.” When one spouse dies, half of their interest in the trust can be split off into a separate trust, known as a “B trust,” “bypass trust,” or “credit shelter trust.” The trust can also absorb all property kept in a separate trust that was formed on behalf of the deceased spouse.

Once the bypass trust is set up, there is the expectation that the principal value of the trust will not be significantly altered. A trustee (who can be the surviving spouse or a third party) is placed into a position of responsibility to manage the trust’s contents.

They may have permission to buy, sell, or trade assets in the trust, but their goal is to build up the total value of the trust. That way, the final beneficiaries can receive as much as possible from the estate of the deceased spouse.

The surviving spouse may be granted a steady income from the proceeds of the trust, providing them with financial security for the remainder of their life. They may also be able to access the contents of the trust for qualified expenses, such as for necessary living expenses or health emergencies.

When the surviving spouse dies, the remaining assets in the trust will be distributed to beneficiaries. These are typically the children or grandchildren of the grantor, but the grantor has the ability to select whomever they want as a beneficiary.

The Other Half of the A-B Trust Goes to the Surviving Spouse

The “A” portion of the A-B trust is designated for the surviving spouse. Also sometimes called a marital trust, the surviving spouse can receive income and other distributions from the trust, but the remaining value of the trust will also be designated for the final beneficiaries.

How an Albuquerque Bypass Trust Affects Estate Taxes

The original purpose of a bypass trust was to reduce the risk that the children of a couple (or other heirs) would pay the full brunt of estate taxes once both parents died.

If the parents instead placed their estate holdings into a living trust, the property counts as lying outside their estate. Children or other beneficiaries could then inherit the contents of the trust estate-tax-free (but not free from income taxes, capital gains, etc.).

This arrangement also reduced the risk that a spouse’s holdings could go over their individual estate tax exemption amount once they inherited the entirety of their spouse’s estate.

Need for Bypass Trusts Reduced (But Not Eliminated) Following Increases to Lifetime Estate Tax Exemption Limit

Keep in mind that, as of 2001, the total allowable estate tax exemption for individuals was just $675,000. That amount was enough to trigger estate taxes on 2.1% of the population, whose heirs could pay as much as 55% on the value of the final estate.

However, major changes followed the passing of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which gradually raised the exemption amount to $3.5 million by 2009.

The Tax Cuts and Jobs Act (TCJA) of 2017 further raised the exemption amount, up to its current high of $13.99 million per spouse in 2025. Note that this amount can be combined for couples, reaching a staggering amount of just under $26 million for a single household.

Further, the TJCA’s passage heralded the introduction of portability, which meant that any unused exemption amount from a spouse could pass to their surviving spouse once they died. This ported exemption is referred to as the deceased spousal unused exclusion amount (DSUE).

Both features have caused the bypass trust to be less necessary, except perhaps for couples with an extremely high net worth. However, there are still potential advantages to forming such a trust, which are discussed in their own section below.

Trusts Pay Taxes on Their Own Income

Another feature of bypass trusts to be aware of is that they must pay taxes on all retained (i.e., not distributed) income at the trust rate. Since trusts have a higher rate of taxation than individuals — and at much smaller bracket increments — planning for both taxation and trust maintenance costs is essential.

Distributions made to the surviving spouse or beneficiaries will be deducted from this trust income and taxed at the appropriate rate for individuals, though. For example, payments made to the surviving spouse that stem from unqualified dividends will be taxed as ordinary income, while proceeds that count as long-term capital gains will be taxed at that rate.

If the entire amount of earned interest is not distributed in a single year (which is highly likely), then the beneficiary of the distribution pays taxes on a pro-rata basis. That means they will pay the same percentage of taxes at the ordinary income rate as the trust earned that year, relative to all other types of income.

For example, if a $1 million trust earned 90% of its income in a year from long-term capital gains and just 10% from ordinary income sources, then 90% of the distribution amount will be taxed at the long-term capital gains amount, with the remaining 10% paying the ordinary income rate.

Carryover Basis for Distributed Assets

Yet one more consideration to bear in mind for bypass trusts is that assets passed through them only obtain a step-up in basis at the time of the grantor’s death. The “step-up” basis adjusts the value of the asset to the time of the transfer. So if a home was purchased in Albuquerque decades ago for $100,000, but it is now worth $500,000, the trust receives the asset when the grantor dies as if the home’s value was always $500,000.

On the other hand, when assets are distributed from the trust to beneficiaries, they receive it on a carryover basis. The same house that was valued at $500,000 at the time it was transferred may now be worth $750,000.

Once those gains are realized (e.g., the home is sold by the children after they inherit it), the beneficiary is responsible for paying taxes on those $250,000 of capital gains.

Benefits of an Albuquerque Bypass Trust Remain, Despite Increases in Estate Exemptions

Because of the large exemption amount and the flexibility of the new portability feature, couples have a reduced need for mechanisms like a bypass trust.

Nevertheless, they may still wish to take advantage of the unique qualities of the trust under certain circumstances:

• Risk of a remarried spouse dying — The portability factor of unused exemptions only applies to the most recently lost spouse. If someone remarries, and then their new spouse dies years later, the surviving spouse must then combine their remaining exemption with that of the most recently deceased spouse. This situation could potentially cause issues triggering estate taxes.
• Wish for certain property to be designated for the original couple’s children — When a surviving spouse remarries and they have inherited their deceased spouse’s entire estate, they retain all rights to handle or distribute the property as they see fit. If the surviving spouse remarries and has additional children, some of the prior spouse’s estate may now go to those new family members. If a family wants to avoid this situation, they can reserve certain estate property in trust, preventing the surviving spouse from promising it to anyone else.
• Protect from new creditor claims — A surviving spouse may encounter new debts, or their new spouse could incur debts if they were to remarry. Creditors could potentially have permission to access all elements of their estate to reclaim debts. A bypass trust shields the deceased spouse’s assets from such a claim, which is the reason that they are sometimes called “credit shelter” trusts.

Get Help Determining the Best Estate Plan Possible With an Albuquerque Bypass Trust Law Firm

At New Mexico Financial & Family Law, we understand that you have many options at your disposal when trying to form plans for your estate — sometimes, an overwhelming number. There are also key factors to consider, like who should be designated as a successor trustee in the event the original one passes or is unable/unwilling to perform their duties.

Meeting with an Albuquerque trust lawyer gives you the opportunity to go over everything you need to consider before you arrive at the best decision for your family. Our attorneys have decades of experience forming trusts and handling estate plans, all while helping families avoid taxes, protect precious assets, or achieve other important goals.

Find out more about how we can assist you and what the ideal estate plan could look like for your family when you call us at (505) 503-1637 or contact us online.