Father Wants Flexible and Low Cost A-B Living Trust

A-B Living Trust can have flexibility when prepared by qualified attorneys

Answer
A-B Trust In General
Low Price vs. Flexibility
Power of Appointment

Question

Dear Mr. Miller: All of this talk has convinced me that Trusts can save my family a lot of money. My wife and I have accumulated about $1.5 million, most of it invested in our residence, two rental properties, and cash and securities. I’ve been told that an A-B tax saving trust can cut about $350,000 in death taxes for our children (and it’s only going to cost us $450). That’s a lot of savings! But I’ve also been told that the “B” trust is irrevocable once one of us dies. We have two children and one has had drug problems throughout his life. He’s O.K. now, but I don’t know what will happen in the future. If we create an A-B trust arrangement now, we would have each child ultimately inherit 50%. But once I die, my wife won’t be able to change the “B “side because it’s irrevocable. If my son inherited this money all at once and was back on drugs, it would kill him! Apparently, we have to choose between the tax savings or the flexibility. This is a monumental decision. Can you suggest a solution? – Distressed Father

Answer

Dear Distressed: Fortunately, you won’t have to choose between tax savings and flexibility. But you will have to choose between low cost and flexibility.

A-B Trust In General

As you have pointed out, an A-B Trust can save large amounts in death taxes for families by allowing a husband and wife to shelter $1.2 million dollars from the tax man (rather than only half as usually occurs without an A-B trust). (Follow this link for more information on estate taxes.) This type of trust generally holds all of the couple’s wealth and, at the time that one of them dies, splits into two trusts. These two trusts are often designated the “A” and the “B” trusts. The former holds the survivor’s share of the assets and the latter the decedent’s share. The survivor can do anything he or she desires with the “A” side and is the complete owner of it. The “B” side provides all of the income to the survivor and, if required for his support, the survivor can withdraw principal from it. But, under IRS rules, the “B” side must be irrevocable after the first spouse dies.

Low Price vs. Flexibility

Despite the irrevocability of the “B” side, substantial flexibility can be built in and this characteristic can solve your problem. But this is where you will probably have to choose between low price and flexibility. You see, most trusts written by the low cost providers, although valid, do not make provision for as many potential “what if’s” or have as much flexibility to deal with potential future occurrences as trusts done by experienced, competent (and generally higher priced) attorneys. One such provision allows the survivor (after the first death) to change the manner of inheritance of the ultimate beneficiaries of the “B” trust. This clause is called a Limited Power of Appointment, is specifically authorized by the Internal Revenue Code, and should solve your problem. Under this provision, after you die your wife could change the terms of the trust to protect your son. (See my FAQ, especially the following questions: Does an A-B Living Trust Have Any Disadvantages?, If I Have More than the Federal Estate Tax Equivalent ($650,000 in 1999), Is an A-B Trust Utopia? for more information on the pros and cons of A-B Trusts and Should I Do It Myself Without An Attorney or: What’s The Difference Between A Valid Trust and An Effective One?.)

Power of Appointment

As with this and various other clauses that can be included in A-B Trusts, there are reasons to have it and reasons not to. So stop trying to save the approximate $1000 additional that you will need to spend and have the job done correctly by an experienced attorney.

Please keep in mind that no two sets of circumstances are identical and that the answer to any legal problem may change drastically based on even a slight change in the circumstances.  5/23/2007