Establishing your estate plan including a Living Trust is merely the first step in avoiding probate and allocating your assets to your loved ones on your death. Trust maintenance must follow to fund the Trust with change in assets, life changing events (death, divorce, inheritance, etc.), and occasional changes in law. The most recent change in law affecting federal estate tax has significantly reduced the need for A/B Trusts and the complex administration.
WHAT IS AN A/B TRUST?
An A/B Trust is typically a shared marital Trust which divides into two (i.e., Trust A and Trust B) at the death of the first spouse. Trust A is typically funded with one-half of the community property and the surviving spouse’s separate property. Trust B is then funded with one-half of the community property and all separate property of the deceased spouse. The surviving spouse may be the recipient of all the income from Trust B, and may also receive some principal, typically if Trust A is exhausted.
The downside of an A/B Trust is that once the first spouse dies, trust administration to ensure proper funding and segregation of Trust A and Trust B assets must be completed. Trust B becomes irrevocable; therefore, taxes must be filed every year going forward for the remainder of the surviving spouse’s life. Trust B creates certain limitations for the surviving spouse.
A/B Trusts were quite common prior to the change in the federal estate tax exemption which was much lower at $5.45M per person, $10.9M per couple, and rises each year in accordance with the Economic Growth and Tax Relief Reconciliation Act of 2001. Today (2022) the Federal Estate Tax Exemption is $12.06M per person, $24.12M per couple, and continues to rise each year. For these reasons, married couples seeking joint trusts may be opting for Disclaimer Trusts.
WHAT IS A DISCLAIMER TRUST?
A Disclaimer Trust leaves an option to be exercised and provide the surviving spouse an opportunity to assess his or her estate at the time of the first spouse’s death and make a calculated decision to disclaim interest in property and establish the Disclaimer Trust. Unlike the A/B Trust, Disclaimer Trust provisions provide the flexibility to the surviving spouse on administration after the death of the first spouse.
Disclaimer Trust property can continue to benefit the surviving spouse during his or her life and at the same time be excluded from the surviving spouse’s estate at the time of his or her death reducing or eliminating the need to file a federal estate tax.
As with the A/B Trust there are certain requirements that must be met before an effective Disclaimer Trust is established. The surviving spouse must not have already accepted the disclaimed asset before later disclaiming and must not be involved in the allocation of disclaimed asset distribution before or after disclaiming. The election to disclaim must be made within nine (9) months of the date of death of the first spouse.
An A/B Trust or Disclaimer Trust can both provide favorable tax consequences and methods of control over assets after the first death. However, if drafted without consideration of the couple’s overall estate and personal needs there may be a loss in the advantages that are available by these legal instruments. If you are uncertain as to whether your current estate plan meets your needs or wish to learn more about your options, we are here to help you design a plan that is customized to your needs.
