Question: My husband and I have been married for over 30 years and all our assets are in a living trust that our attorney created for us in 1997. When one of us dies, our A/B trust will split into two trusts: a survivor’s trust (the A trust) and a bypass trust (the B trust). The A trust will be revocable and contain assets that the surviving spouse will control with no limitations. He or she can keep them, spend them, or give them away. The B trust will be irrevocable, and it will impose limits on what the surviving spouse can do with the assets. Our children will eventually inherit everything anyway, so I question the need for this A/B trust scheme. What do you suggest?
Answer: Read what I have to say and then visit your estate planning attorney for further guidance.
You may no longer need an A/B trust. In the past, one reason to have an A/B trust was to minimize or avoid estate taxes. A person who died in 1997 was subject to paying as much as a 55% tax on his or her assets over $600,000. Married couples were able to raise that hurdle to $1.2 million by using an A/B trust. Things are different today.
The estate tax only applies if your assets exceed $5.25 Million, and married couples can avoid estate taxes without an A/B trust if their assets do not exceed $10.5 Million. The reasons you may want to avoid the A/B trust are as follows. When the first spouse dies and the couple has an A/B trust, the surviving spouse must fund the B trust by transferring assets into it, usually with the help of their attorney. They do this by retitling property. When this funding process is complete, the surviving spouse will have two trusts to manage--the survivor's trust (Trust A) and the bypass trust (Trust B).
However, surviving spouses end up with their bank accounts, brokerage accounts, investment and rental real estate, art work, collections, and even their home divided up into two different trusts to manage. The surviving spouse reports income from the A trust on his or her annual personal tax return and income from the B trust on a separate annual fiduciary tax return.
Even if you no longer need an A/B trust, you should keep your assets in a living trust if you want to avoid probate after you die and, while still alive, to allow a successor trustee to take over for you without having to go to court to appoint a conservator if you become incapacitated.
Your attorney can easily amend or restate your current A/B trust. One popular change these days is to have the trust document give the surviving spouse the power to decide whether or not she wants to fund a bypass trust. This can be accomplished by incorporating a “disclaimer” provision in you’re A/B trust. This will allow the surviving spouse to fund the B trust only if needed and if not, to avoid the hassle of dividing assets and managing a second trust. Some couples without an estate tax problem, especially those with blended families, will want to keep the bypass trust for control purposes.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and principal of Monterey Private Wealth, a wealth management firm in Monterey, CA. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to Ken@montereypw.com