This Week's Topic: Using Your IRA to Fund Your Bypass Trust

Using you IRA to fund or to help to fund your Bypass/Exemption/Credit Shelter Trust on the death of the first spouse to die is sometimes considered because that is where the bulk of the investments are located and if the IRA names the surviving spouse as the beneficiary the first spouse to die will have wasted much of their exemption and then the surviving spouses estate will be overloaded with assets and possibly face estate tax when then surviving spouse later dies.

However, because of the advantages of naming people rather than trusts as beneficiaries, it has been my experience that it is usually best just to name the surviving spouse as the beneficiary and work on some other techniques to cover the loss of the exemption. Also, remember that the federal estate tax exemption is moving to $2,000,000 in 2006 which should cover most estates. And if you have a much larger estate, a life insurance program should be seriously considered in any event to cover the anticipated federal estate taxes.

The advantage of naming your spouse as beneficiary of your IRA is that she/he can roll-over the IRA into a new IRA and start all over again and perhaps extending the life of the IRA to keep the IRA assets growing on a tax-deferred basis for as long as possible.

Funding a Bypass Trust with IRA assets is a very tricky proposition from a tax prospective. It has been and can be done, but with exemptions now moving up fairly rapidly in the coming years, clients should re-think that idea with their estate planning team. In most cases, it is better to allow the IRA assets go directly to named persons and use other assets to fund the Bypass Trust. And if there are no other assets to fund the Bypass Trust, consider how soon the increase in the Federal Estate Tax Exemption will increase to cover the entire estate and the likelihood of at least one of the spouses living that long to eliminate the estate tax.