Question: You wrote a column a year or two ago about the bypass trust and how it may no longer be necessary in some cases. In our case, 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 I will control with no limitations. I am assuming that my husband will die before me. I can keep those assets, spend them, or give them away. The B trust will be irrevocable, will impose limits on what I can do with them, and will require its very own tax return every year. Our children will eventually inherit everything anyway, so I question the need for this A/B trust scheme. Can you reprint your answer, and include any updates?
Answer: Until 2010, traditional estate planning usually consisted of a living trust based upon an “AB” and sometimes “ABC” trust structure. Under this scheme, when the first spouse dies, the living trust is divided up into two or three trusts. Trusts A and B are as you described. Trust C, when needed, is a QTIP Trust.
In 1997, when your trust was drafted, the estate tax exemption was $600,000. A person who died in 1997 was subject to paying tax rates as high as 55% on his or her assets over $600,000. ABC trusts allowed married couples to raise that hurdle to $1.2 million. That exemption has increased to $5,450,000 in 2016 and the estate tax only applies if your assets exceed that amount. Married couples today can avoid estate taxes without a Bypass trust, with proper guidance, if their assets do not exceed $10,900,000.
There are compelling reasons to avoid the ABC scheme. When the first spouse dies and the couple has an ABC trust, the surviving spouse must fund the B (and sometimes C) trust by transferring and re-titling assets, usually with the help of their attorney. When this funding process is complete, the surviving spouse will have two or three trusts to manage. Surviving spouses end up with ownership of their bank accounts, brokerage accounts, investment and rental real estate, art work, collections, and sometimes their home divided up into different trusts. Managing your own money plus that of a trust or two can be burdensome.
Even if you no longer need an ABC 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.
If appropriate for you, your attorney can easily amend or restate your current ABC 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. 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 advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. 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, CA93940 or email them to firstname.lastname@example.org.