Most modern Revocable Living Trusts do not have a Mandatory Bypass Provision, which is usually good planning. This provision is normally NOT necessary, and if you have one, it can cause unnecessary headaches after the first spouse dies. A mandatory bypass provision will require splitting and re-titling of the trust assets between a Revocable Survivor’s Trust and an Irrevocable Exemption Bypass Trust after the first spouse dies. You will need a tax I.D. number for the bypass trust, and a fiduciary tax return will need to be filed every year. The surviving spouse will also not have complete control of the assets in the irrevocable bypass trust. The mandatory bypass trust makes Medi-Cal qualification more difficult, because the state will require that you exhaust the assets of the bypass trust before you can qualify for Medi-Cal.
The primary purpose of a mandatory bypass provision in your revocable living trust is to save on death taxes, aka inheritance taxes. The current federal death tax exemption amount is $5.45 million per individual. So if you think you will have more than $5.45 million dollars after the first spouse dies, the mandatory bypass may be useful. Also, if the spouses have a blended family with “his mine and ours” children, the mandatory bypass trust can protect the assets of the children of the first spouse to die.
To avoid issues created by mandatory bypass provisions, you can instead have a discretionary bypass provision in your revocable living trust. This will provide the same results as a mandatory bypass, but will give the surviving spouse the discretion of funding a bypass trust for tax purposes. However, this funding must be completed within 9 months of the date of death of the first spouse to die. You should now check the provisions in your revocable living trust that tell you what to do after the first spouse dies. If the provisions call for a mandatory bypass trust and a split of the assets after the first to die, you may want to have the provision changed by your elder law attorney with an amendment. Most older trusts have a mandatory bypass provision, which should probably be changed.
This information is not to be taken as legal advice, and you are encouraged to see your elder law attorney. At the Law Offices of Michael J. Young, at 1931 San Miguel Dr., Ste. 220, Walnut Creek, CA www.WalnutCreekElderLaw, 925-256-0298, lawyoung1@gmail.com, we practice Elder Law and we help Baby Boomers, Seniors and families through their Elder Care Journey. We help families with long-term care planning, asset-protection plans, comprehensive estate planning, wills, trusts and powers of attorney. We also help the older client and their families get their “Ducks in a Row” in order help them qualify for Medi-Cal and the VA Aid & Attendance Improved Pension benefit.