Legal Updates


posted Nov 12, 2013, 4:52 PM by Roxanne Olson   [ updated Nov 14, 2013, 5:16 PM by Roxanne Olson ]

Many lawyers over the years have sold their clients A/B trusts (also known as ABC, Bypass, Marital, & Exemption Trusts). The main reason for this type of trust is to avoid estate taxes upon the second spouse’s death. But when the estate tax exemption changed in January 2013 to 10 Million dollars for every married couple, the vast majority of people in the United States no longer had to worry about estate taxes.

If you have a revocable living trust drafted before January 2013 (or even if it was drafted after) it is important that you find out whether or not it is an AB trust.

An AB trust will burden the surviving spouse with:

1) an enormous amount of paperwork after the first spouse dies

2) restrictions on access to the money in the new, irrevocable trust.

3) annual paperwork that must be completed on a regular basis for the rest of that spouses’ life.

4) obligations to answer to the beneficiaries (child beneficiaries are able to sue their own mother to stop her from using “their” future inheritance)

Many AB trusts are drafted without regard for the net worth of the client. Even if you have no estate tax obligation the surviving spouse will be forced to set up this burdensome irrevocable trust.

Since AB trusts are more expensive to administer, there will be higher legal fees and less inheritance for your beneficiaries.  

Throughout the 80’s, 90’s, and beyond the AB trust was most often the default choice. Because of the then-lower estate-tax exemptions, almost all law offices universally encouraged these approaches from a perspective of assumed need. Yet that assumed need, it has turned out, often ended up being wrong. That’s because the exemption amounts began rising dramatically in the year 2000 and from a tax standpoint (with the increased exemptions) many couples didn’t end up being worth enough to justify the complications of an AB or ABC trust. This essentially made the AB and ABC trust a completely useless albatross for those who otherwise just wanted to leave everything outright to their spouse. Understanding this is important as a matter of perspective — because sadly it seems many lawyers have stayed stuck in the past.

I can draft a trust that will both protect you against the possibility that Congress will lower the estate tax exemption, but  won’t lock the surviving spouse into the  nightmare of administering an A/B trust if one isn’t needed.

Is It More Than A Tax Issue To You?
In all fairness, this can be more than a tax analysis for some couples. If you are highly concerned with what your spouse does with your share of assets, the trust structure becomes much more than a tax issue and enters a whole new realm called “preserving testamentary intent”. Spouses want to use the legally obligating, restrictive nature of the AB and ABC trust to restrict what their spouse can do with the assets after they die. This is where it gets tricky, because when thinking about such a strategy, you have to ask yourself just how worried you are. While preserving your testamentary intent might be great in theory, it is important that you also understand that it is not a free ride. Choosing an A/B trust requires you to impose the aforementioned burdens, responsibilities, inflexibility, bookwork, accountings, tax filings, accountability and liability to others, reporting requirements, and other hassles on the surviving spouse for life.   Never lose sight of the fact that you may be the spouse left behind with your own self-created quagmire. This possibility alone causes many spouses to decline such a strategy. That is why you each must carefully weigh just how much this concerns you. 

If it is a large and genuine concern to you then these measures may well be justified and appropriate for your situation. This is an individual choice. There is no right or wrong in this decision, just philosophies and varying approaches to these issues. If you are interested in such a strategy you can read more about it by clicking the link below entitled “Planning for Blended Families”.

The important thing is to have a lawyer who is willing to take the time to explain it to you.   

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