Question

one of the most common uses for a bypass trust is to: a provide capital to pay estate taxes b bypass capital gains taxes but pay ordinary income taxes on the assets c bypass all tax obligations on income paid to the beneficiaries d pass assets from the second deceased parent to his children

Answer 1

A bypass trust is commonly used to pass assets from the second deceased parent to their children, utilizing both spouses' estate tax exemptions and reducing potential estate taxes.

Step-by-step explanation:

One of the most common uses for a bypass trust is to pass assets from the second deceased parent to their children. A trust is an estate planning tool, serving as "the family bank," which becomes irrevocable upon the creator's death. It allows for the transfer of assets without the need for probate, and in the case of a bypass trust, it also provides a mechanism to effectively utilize the estate tax exemption of both spouses, thus reducing the potential estate tax burden when the second spouse passes away.

The estate tax is a federal tax applied to transfers of property upon death. Estates valued below a certain threshold are exempt from this tax. In 2022, the estate tax only applied to estates larger than $12.06 million. A bypass trust aims to avoid estate taxes over a couple's exemptions, not to bypass capital gains taxes or all tax obligations on income paid to beneficiaries.