There are many different kinds of trusts, some more complex than others and are used for tax benefits. While these tax benefits may have made sense for the average family in the past, due to recent changes in estate tax law, these trusts no longer provide the tax benefits they used to and come with a price that many families are unaware of.
In the last few months, I have had multiple A/B trusts slide across my desk for review. While I am able to prevent the pitfalls of A/B trusts for my clients, others come to see me too late and are stuck with an outdated estate plan drafted by their previous attorney who has since retired.
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 all 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 2013, the estate tax exemption rose to $5.25 million, meaning that a married couple with less than $5.25 million in total assets would not need to utilize the tax planning benefits of an A/B trust. Additionally, on January 1st, 2013, portability was introduced to our estate tax law and enables the surviving spouse to utilize their late spouse’s tax exemption, which completely eliminates the need for A/B trusts for 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 A/B trusts.
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.
For more information or to speak with a lawyer, please call us at (530) 268-5485, visit our website, www.LenhartLawOffices.com, or send us an email at Gabriel@LenhartLawOffices.com.