Do I need a bypass trust?

[nwsvndr]

Currently, I believe a person can pass along $700,000 upon death, tax free.

Say I live in VA, and have $700,000 in assets held jointly with my wife, with my share willed to my wife upon death. Say I also have a life insurance policy for $700,000, with my adult (age 18 or above) children as benificiaries. Now say I die. Do my children inheret the $700,000 of insurance proceeds tax-free, while my wife gets my share of the assets tax free? Or are there tax implications at this point?

Next, say my wife dies, with the exclusion still at $700,000 and the assets still worth $700,000, willed to those same children upon her death. Do they get her $700,000 tax free?

Or would I need a bypass trust to pass along the full $1.4 million tax free?

Any insights are appreciated. Thanks.

 

[ALawyer]

The amount went up to $1 million on 1/1/2002.

As of now, if you died the $700k insurance to the kids would use up most of your $1 million lifetime exemption. The amount to the spouse is not taxable. If she died, next, there would be no tax on the $700k more to the kids. BUT if she died before you, and you left the kids $1.4k then there would be an esttae tax to pay. An absolute assignment of the policy to the kids, plus 3 years, eliminates that problem.

 

[loku]

First of all, there is an unlimited marital deduction for the estate tax—you get a deduction for the value of all property left to a spouse. That leaves the $700,000 in life insurance. That amount would be included in your taxable estate, but the lifetime exclusion for deaths in 2002 is $1,000,000, so there would be no tax on your estate in that case.

If after that, if your wife dies and leaves the $700,000 to your children, there would be no estate tax on that because your wife’s estate would be entitled to the lifetime exclusion (currently $1,000,000, and scheduled to increase in the future).