Credit Shelter / Bypass Trust: What Assets are Good?

[sdawson]

Oregon has a low estate tax exclusion of 1 million dollars. Assets above that are taxed at 10% when a person dies, this is the Oregon Estate Transfer tax. The 1 million is not portable to the surving spouse. So it is 1 million whether a single person or a couple.

I am educating myself about Credit Shelter Trusts aka Bypass Trusts, to take advantage of the 1 million exclusion when the first spouse dies, then the different 1 million excusion when the second spouse dies.

I have read some online and watched some videos, and watched an Estate Planning seminar (which is where I first learned of these trusts).

My question for the forum is:

What are good assets to leave in a Credit Shelter Trust when one passes?

I understand that when properly done, real estate gets the step up basis when first put into the trust but then appreciation after that is taxable. Same for stocks and other appreciable assets. If the second spouse lives 15 years past the first (likely in my case) then the eventual tax bill would be significant, and it seems like it would be better to leave the house outside such a trust if planning on leaving to children.

There was some talk in the seminar about funding life insurance inside the trust, as that would not be taxed.

Or placing dividend oriented stocks inside the trust, to generate income for the remaining spouse while they are alive, but limit growth of the value of the trust.

But I have spent all of two hours learning about this, so I am open to all knowledge here.

 

[RetiredHappy]

Best to talk to a trust/estate attorney in Oregon.

 

[sdawson]

Thanks RetiredHappy. I will do when we update our estate planning documents in the coming year, but I like to educate myself first so I know what questions to ask. I like to enter with some knowledge and ideas for a better conversation.

 

[pb4uski]

Have you run your situation through Gemini or Perplexity or ChatGPT? They should be able to provide you with some good background to educate yourself before you talk with an Oregon trust/estate attorney.

 

[sdawson]

Yes, I have and have saved those conversations. Just kicking around ideas for now. But getting a better understanding how dividends or interest or capital gains would work.

If the interest or dividends are paid out to the beneficiary each year, then they are taxed as income by the recipient, not as income by the trust. Income which remains in the trust hits a high tax bracket pretty early, so having the trust distribute income regularly is an idea. Something conservative that would produce some income, yet not appreciate in value is a possible option. Down the road, when both spouses pass, the children could choose to close the trust without a large capital gains tax.

Playing around a bit with the idea that long term treasury bonds may be a fit, especially if the yields stay above 5% in the coming years. They kick off regular interest that could be paid to my wife while she lives.

But I need to talk to a professional to see if the exemption from state tax on the payments would carry over when distributed to a beneficiary.

I need to educate myself more on trusts in general it seems.

Update:
OK, AI is reporting that the income maintains its tax exempt status when paid to the beneficiaries.

 

[Sunset]

Can you move your assets to some other state ?

Or move yourself, and just visit Oregon 179 days a year during the good weather.

 

[nwsteve]

If 10% is your top bracket you are lucky--in WA, our top bracket is 20% (9Mill+) but first 3 mill is exempt.

 

[sdawson]

>nwsteve,

10% is not the top, it is the lowest level. It goes up to 16%.

Oregon's regular income tax is 8.75% BTW, but that is another story, I mention it in comparison to WA though.

>sunset,
For family reasons currently moving to another state is not on the table. However, if we were to move in the future, it would be to move close to our children -- one is in San Diego, the other is in New York city. Lovely places to visit, but not exactly low cost of living areas to retire to.