Can a bypass trust hold real estate?

The question of whether a bypass trust, also known as a B Trust or credit shelter trust, can hold real estate is a common one for individuals engaging in estate planning, and the answer is a resounding yes, but it requires careful consideration and execution.

What Happens if I Don’t Plan for My Assets?

Many people believe that their assets will automatically pass to their loved ones in the event of their death, but this isn’t always the case. Without proper estate planning, assets can be tied up in probate court, a lengthy and expensive legal process. In California, formal probate is required for estates over $184,500, and statutory fees for executors and attorneys can significantly diminish the value of the estate; these fees are typically based on a percentage of the estate’s value, adding a considerable financial burden to grieving families. Approximately 60% of Americans don’t have a will, leaving their estate’s distribution to be decided by state law, rather than their wishes. It’s a surprising statistic that highlights the need for proactive estate planning.

How Does a Bypass Trust Work with Real Estate?

A bypass trust is a powerful estate planning tool designed to take advantage of both spouses’ federal estate tax exemptions. When the first spouse dies, assets up to the then-current federal estate tax exemption amount (currently over $13.61 million in 2024) are placed into the bypass trust. This effectively removes those assets from the surviving spouse’s estate, preventing them from being subject to estate taxes when the surviving spouse eventually passes away. Real estate can be a significant asset, and transferring ownership to the bypass trust is a common strategy to maximize tax benefits. The surviving spouse retains the right to use and enjoy the property, potentially receiving income from it, but it’s no longer considered part of their taxable estate. This is especially important in California, where, despite not having a state-level estate tax, federal estate taxes can still apply to larger estates.

What are the Benefits of Holding Real Estate in a Bypass Trust?

Holding real estate in a bypass trust offers several key advantages. Primarily, it shields the property from estate taxes, allowing more assets to pass to heirs. Secondly, it can provide asset protection, safeguarding the property from potential creditors. All assets acquired during a marriage are considered community property, owned 50/50. A significant tax benefit arises from the “double step-up” in basis for the surviving spouse. This means the property’s value is “stepped up” to the current market value at the time of each spouse’s death, reducing potential capital gains taxes when the property is eventually sold. For example, if a couple purchased a property for $200,000, and it’s worth $1 million when the first spouse dies, the basis is stepped up to $1 million. When the surviving spouse dies, the basis is stepped up *again* to the then-current market value, potentially eliminating substantial capital gains taxes. I once had a client, David, who, due to failing to establish a bypass trust, lost a considerable portion of his estate to estate taxes on a valuable vacation home in Big Bear. His family felt the loss keenly, as the home held many cherished memories.

What Legal Considerations Should I Be Aware Of?

Transferring real estate into a bypass trust requires careful legal documentation and adherence to specific requirements. California recognizes two types of valid wills: a formal will (signed and witnessed by two people at the same time) and a holographic will (material terms are in the testator’s own handwriting, no witnesses needed). However, for a trust, it’s crucial to ensure the trust document is properly drafted by an experienced estate planning attorney. The trustee, responsible for managing the trust assets, must follow the “California Prudent Investor Act” when making investment decisions. Additionally, any no-contest clauses in the trust or will are narrowly enforced and only apply if a beneficiary files a direct contest without “probable cause”. It’s also vital to address digital assets; an estate plan must grant explicit authority for a fiduciary to access and manage digital assets like email accounts and social media profiles. I recall another client, Maria, who, after setting up a comprehensive estate plan with a bypass trust, had a smooth and efficient transfer of assets to her children, avoiding the complications and expenses her friend, who passed away without a plan, faced.

If you’re considering a bypass trust to hold real estate, it’s crucial to seek expert legal advice.

Steven F. Bliss ESQ. can provide guidance tailored to your specific circumstances and ensure your estate plan is legally sound and effectively achieves your goals. Call (760) 884-4044 to schedule a consultation.

Don’t leave your legacy to chance. Secure your future and protect your loved ones – proactive estate planning is the key!