Essential To Middle Class Planning Bypass trusts, although not triggered under the tax laws for 2011 and 2012 for most of the middle class, remain a critical asset protector for t the bypass trust can protect trust assets from the surviving spouse. Often bypass trust permits distribution of all income to the surviving spouse. In addition, the surviving spouse may have access to the principal of the bypass trust, limited by an ascertainable standard where the surviving spouse is also the trustee. If all distributions of principal and income were limited by the trustee’s discretion, no creditor could levy judgment. Because all distributions are subject to the exercise of the trustee’s discretion, the beneficiary cannot compel any distributions. Thus, the creditor is not permitted to any distributions of income or principal. | This works best when the trustee is not also the beneficiary. But even in that case, a carefully constructed provision which allows the surviving spouse to resign as trustee at the first hint of trouble from a potential creditor, in favor of a trustee friendly to the surviving spouse. Trust Income Tax Without creditors on the horizon, the trustee can exercise its discretion and distribute all of the income to the surviving spouse, resulting in the income being taxed at the surviving spouse’s individual rates. When a creditor does surface, distributions are withheld and income is taxed at the higher trust rates. But even taxation at the higher rates keeps more in the trust than if the creditor were to get access to all of the income. |