Is Your Estate Plan Obsolete?
There are many different kinds of trusts, some more complex than others and were used in the past for tax benefits. While these tax benefits may have made sense in the past for the average family, due to recent changes in estate tax law, these trusts no longer provide the tax benefits they used to and come with a lofty cost down the road that many families are unaware of.
For decades, lawyers routinely drafted A/B trusts for married couples in an attempt to utilize both spouse’s tax exemption. In the last few years, I have had multiple A/B trusts slide across my desk for review. While I am able to prevent the pitfalls of these trusts for my clients, others see me too late and are stuck with an outdated estate plan that does not provide for the surviving spouse as it should.
An A/B trust remains revocable while both spouses are alive. Thus, the couple may withdraw assets or cancel the trust completely before one spouse dies. However, when the first spouse dies, the trust becomes irrevocable and splits into two parts: the A trust and the B trust.
The A trust contains the surviving spouse's half of the estate. The surviving spouse controls property in the A trust and may receive distributions of income and principle. The B trust contains the deceased spouse's half of the estate. The B trust belongs to the beneficiaries named in the trust (usually the couple's children), and is typically irrevocable. Since the B trust becomes irrevocable, the surviving spouse is often unable to access half of the estate and is left with the half of what they previously had to survive on.
This type of trust made sense in 2001 if their combined assets totaled more than $675,000 because the couple was able to utilize each spouse’s tax exemption, meaning that taxes would only be paid on their estate if their combined worth exceeded $1.35 million. However, as the tax laws change, so does the need for an A/B trust for the average family.
In 2015, the estate tax exemption rose to $5.43 million per person, additionally, on January 1st, 2013, portability was introduced which enables the surviving spouse to utilize their late spouse’s tax exemption without limiting access to these funds. These changes eliminate the need for this type of estate tax planning.
If you have an A/B trust and are unsure as to whether it is still useful to you and your family, please contact your attorney or myself to review your estate plan and save your family from the pitfalls of an obsolete estate plan.
Please note that this article is a general summary of law and omits many important details, footnotes, and caveats. It is no substitute for legal advice from a lawyer based on your particular circumstances.