Is an “A/B Trust” the “Best?”

My Mom just signed a new Living Trust.  She lives in Northern California and has an estate of probably $2.5 million including her house.  The Bill for the services says it is an “A/B” Trust.  I asked her about this and she said that the service that drafted the document gave her a choice of an “A/B” Trust or a “Simple” Trust.  When she asked which they thought she should get, they said the “best” was an “A/B” Trust.   Something doesn’t sound right to me.

Why would the service give a choice, wouldn’t they just recommend one and is there really a “best?”

Daughter Worried that Her Mom Got Taken

Document Preparation Service
Is the A/B Trust the ‘best’ type of trust?
Are there problems that can be caused by the use of an A/B Trust?
Another problem has to do with Medi-Cal
Reason to Have Documents Reviewed Periodically
First Meeting Complimentary

Dear Worried:

Document Preparation Service:  From your short description it appears that your Mom did not go to an attorney but rather to a “document preparation service” (DPS for short).  California authorized this type of service back in 2000.  These providers are essentially paralegals (but since 2000 a paralegal has to work under the supervision of an attorney), not attorneys and are not allowed to give legal advice, only prepare documents that the client requests them to prepare.  That is probably why the service simply gave your Mom a choice of which Trust she wanted rather then recommending one or the other to her.

Many years ago I wrote a short answer to the question of the difference between a typist, a paralegal and an attorney.  Here is the link to that.  Just substitute “document preparation service” for paralegal in that answer and (other than prices that are woefully out of date now) you should be good to go.

Although many attorneys might think that this type of service is cutting in on their monopoly, I believe the service has its place.  But the problems are two fold, one, at least some don’t’ adhere strictly to the requirement of not giving advice.  Two, for people like your Mom worth $2.5 M, a DPS is simply not appropriate.  I’m not sure where the cutoff is and it really is determined by how complex the situation may be not just net worth, but one with a $2.5M net worth generally does not have a simple situation.

Is the A/B Trust the ‘best’ type of trust?   There are thousands of different ways to configure a Trust.  The A/B approach is just one (and, of course, has many possible sub configurations).  Typically it is used for death tax savings between a married couple.  If your Mom is single, I have no idea how an A/B approach would be the way to go.  Maybe there are other facts here, but it certainly does raise questions.  Further, the death tax (properly called the Federal Estate Tax) does not kick in in 2021 until a single person hits over $11M net worth (and a married couple can double that exemption amount fairly easily).  That number is set to come down to about half in 2026 and there is discussion in Congress about bringing it down further but still, the “best?”

Are there problems that can be caused by the use of an A/B Trust?  Keep in mind that everyone has different needs, goals, family dynamics, and idiosyncrasies, so nothing is right for everyone.  In other words, the proper tool for the job.  So what can be wrong with this type of Trust?

I’m not going to discuss all of the potential problems but, at death, this type of trust requires a division of the estate into an “A” survivor’s side and a “B” decedent’s side.  At the time of death, that makes things more complex, requires more attorney time, and generally costs more to settle the estate.  So unless there is a reason or reasonable potential benefit for using this type of trust, it is not the best.

Another problem has to do with Medi-Cal.  Lately I have seen a number of families wanting to qualify their parent for Medi-Cal.  They all had A/B Trusts with one parent already having passed.  Generally, if we are talking about A/B Trusts for death tax savings we are not talking about Medi-Cal and if we are talking about Medi-Cal we are not worried about the death tax.  One of the approaches to qualifying for Medi-Cal is to get into a gift giving campaign to bring one’s net worth below the Medi-Cal requiement without triggering any Medi-Cal penalties.  If half the assets are in the A Trust and half in the B Trust, the latter of which is always an irrevocable trust, that makes it much more difficult to give the assets away.  Again, when I use the term difficult that generally equates to more attorney fees.

Reason to Have Documents Reviewed Periodically:  And all of this discussion indicates why it is so important to have your estate planning documents reviewed periodically, maybe every 2-3 years.  Laws change, your circumstances change, your net worth goes up substantially (or down), family members get sick or exhibit financially worrisome habits, etc.   By seeing your attorney every few years, adjustments in your plan and documents can be made so that the probability of a good outcome when you die shoots through the roof (rather than dropping through the floor).

First Meeting Complimentary:  Bottom line, if you have enough to be worried about Trusts, you should consult an attorney, not a DPS.  Our first meeting is complimentary.  I have, on innumerable occasions, told the client at that meeting that they don’t need me and a DPS or other inexpensive solution will resolve the issue.   Have your Mom give us a call at 760-436-8832 to see if she needs to make changes.