In order to remaining on the up and up with the IRS, and to ensure that the estate will not be taxed a second time when the remaining spouse passes, there are a number of rules that must be followed.

1. The remaining spouse must have limited access to the trust for the remainder of his life. In short, the remaining spouse does not have unlimited access to the principal of the trust. He or she cannot withdraw as much as he or she wants whenever they want. Instead, the bypass trust is designed to provide funds for health, maintenance, education and support as well as the ability to withdraw $5,000 or 5% of the principle, whichever is greater, each year. Please note that because the remaining spouse can be named as trustee of the bypass trust, this law is actually somewhat flexible.

2. The remaining spouse has a limited ability to distribute the assets of the trust at the time of their death. The remaining spouse cannot simply leave the remaining assets of the trust to his own estate, his own creditors or his estates creditors. The bypass trust can be set-up to permit the remaining spouse to designate a person, or people, to succeed the trust upon their demise. For example, the bypass trust may state that the remaining spouse may divide the remaining assets among their children. Another option is to designate the final heir in the bypass document itself, leaving the remaining spouse no discretion in the matter.

If you are considering forming a bypass trust, it is critical that you work closely with a trust attorney. The language set forth by the IRS is very specific. Any deviation, no matter how slight, may result in a revocation of the rights granted by the bypass trust. In other words, if the bypass trust is not properly worded, the benefit, that the trust will not be taxable after the second spouse passes, will be revoked.

A bypass trust can be an excellent financial tool for estate planning purposes. It gives couples the ability to control their estate, even after they pass. It also prevents them from saddling future heirs with what can be very costly estate taxes. Proper planning of your estate may very well include a bypass trust. Consult your attorney to determine if this is the best tool for you, your spouse and your joint estate.

First, consider that it is possible to gift your children money. As long as the amount is $13,000.00 or less a year, the money is non-taxable. While this can serve as an adequate measure to distribute funds without worrying about estate taxes, and will work for estates of all sizes, many parents are concerned that the children in question are mature enough to handle the money.

If you would still like to gift the $13,000.00 each year, but wish to provide protection for that money, a good idea is to set up a trust. A formal trust will keep the money out of the child’s hands until they reach a pre-determined age. The money in question would be gifted directly to the trust, after which a trustee would invest and administer the funds. It is possible to name yourself as the trustee and thus save even more money.

There is a downfall to this concept. In order for the money to be considered a gift, the child must have a ‘present interest’ in the money. Simple put, they must have the right to take and spend the money at any given time. It is possible to put restrictions on the money and still be eligible for the gifting tax break. One such way to do this is a Crummey Trust.

The idea of the Crummey Trust comes from the Crummey family. They set some significant restrictions on the trusts of their children and when the IRS tried to deny them the tax exclusion, the Crummey family went to court and won.

What is different about the Crummey Trust is that the child does not have rights to any of the income. What they have is a right to make a withdrawal from the trust in the total amount of each gift as long as they do so within thirty days of the gift date. This clause means that the child has a ‘present interest’ in the trust. If the child does not make the withdrawal of the gift prior to thirty days, the gift reverts in full to the trust and the child loses the right to withdraw it until the pre-determined distribution date.

As you can see, a Crummey Trust offers a large degree of protection for the both the gifted money and the overall trust. For parents looking to gift part of their estate each year without worrying their children will spend it, the Crummey Trust is an excellent option.