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Funding a bypass trust

Guest Mary Ann

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Guest Mary Ann

Client has assets as follows:

IRA 1,000,000

House 400,000

Lots, cash 200,000

Total Assets $ 1,600,000

This is a married couple, community property. When the first spouse dies, which assets would you put into the Bypass trust?

If it is the house, the opportunity to not pay income tax on gain at sale is lost.

If it is the IRA - I didn't think the IRA could be put into a trust because it was already a trust. Wrong? And if the trust is named as beneficiary what are the consequences?

How would you fund this bypass trust? Or what steps would you take now to insure that it could be funded properly when the time comes?

Appreciate any comments.

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Guest Deborah Grace

Couple of thoughts on your question, all of which are caveated by the fact that I do not practice in a community property state.

First, if the house is put in the bypass trust, then at the death of settlor of the trust, there is a step-up in basis to date of death value. Any gain after death would be subject to tax.

A bypass trust can be named as the beneficiary of an IRA, but there are a number of technical issues to understand. First, if you want the spouse's life expectancy to be the measuring life for minimum distributions, the spouse needs to be the sole income beneficiary. If a charity will be a remainder person, you may not be able to use the spouse's measuring life. There are PLR's that address this issue.

A number of commentators have written on this complex issue.

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