Should I Leave My A-B Trust in the Dust?

The answer to this question will depend on a lot of your particular family and estate circumstances.  A-B trusts are only useful for married couples.  If you created your A-B trust for primarily non-tax purposes, then it may still be wise to keep the structure.  For example, if you have children from prior marriages or significant separate property funded in the trust, an A-B trust may continue to serve your needs.  However, if your primary reason for the A-B structure was estate tax protection, it may be time to reconsider.

As an initial matter, changing the type of trust you have does not require that you revoke your trust.  You will not need to change your accounts or your home title and complete other funding tasks that were essential when the trust was initially created.  Instead, you can simply restate your trust which, effectively, amends the entire document.   In the amendment, the requirement for a B trust may be eliminated.

Presently, no one truly needs an A-B trust for estate tax purposes.  Contrary to the rule for probate, which is based on your gross estate (adding up the value of all your assets), estate tax is based on your net estate (your gross estate less debts and certain expenses).  If your net estate exceeds $5.25 million, then your estate may benefit from the use of an A-B trust or filing an estate tax return, but may not require both.  Both methods of preserving the estate tax exemption have timing issues and ongoing administration issues, but depending on your choice, both can be effective for estate tax purposes.

Furthermore, the administration of an A-B trust is more complex and, therefore, more costly.  Depending on the makeup of your estate and the wording of your trust, splitting the assets in an A trust and a B trust may be problematic.  The trust may require that the surviving spouse exhaust available assets before gaining access to the principal in the B trust.  If you have a relatively small number of assets comprising your estate, funding the B trust may be cumbersome or interfere with capital gain basis planning.  Additionally, tax returns will be due annually for the B Trust as an irrevocable trust.

Similarly, changes can be made within your existing A-B trust to add flexibility to the trust.  Allowing the B trust to become a disclaimer trust where the surviving spouse chooses which assets to transfer to the disclaimer trust without the burden of abiding by a funding formula could preserve many of the tax benefits of the A-B trust structure.  Another recently en vogue strategy is to use a “trust protector” clause, which allows a third party to determine whether the B trust ought to be eliminated.  Adding such flexibility may be a good option if you are concerned that the estate tax may be still be lowered during your lifetime.  If your trust has not been reviewed in several years, now may be a good time to review the structure of your trust document with the help of a qualified attorney.  As always, there are pros and cons for any path you consider.

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