The Unified Estate Tax Credit, adjusted for inflation in 2015, is $5,430,000 (the “Unified Credit”). Prior to calendar year 2010, the amount of the Unified Credit was substantially less. For several years prior, many trusts created by spouses included mandatory A-B provisions. Mandatory A-B provisions provide that upon the death of the first spouse to die, all of their combined property would remain in trust, but would be allocated into two separate shares designated the “A” trust and the “B” trust. The “B” trust would consist of the deceased spouse’s share of the trust estate, up to the maximum amount that would qualify for the Unified Credit during the year of death.
By isolating the amount of the Unified Credit in the “B” trust and limiting the power of the surviving spouse to invade principal, that portion of the total estate would be exempt from later taxation in the estate of the second to die. The surviving spouse would be entitled to income, but distributions of principal would be limited, and the surviving spouse could not amend or revoke the “B” trust. The “A” trust would consist of the surviving spouse’s share of the trust estate. Typically, the surviving spouse would have the right to amend or revoke the “A” trust and would not be restricted with respect to principal distributions.
In that the Unified Credit is presently $5,430,000, and includes portability provisions, an A-B Trust may no longer be necessary in order to minimize or avoid estate tax. It is important to determine whether your needs are still served by including the A-B provisions in your trust. A less complicated trust may be more appropriate. A joint trust between spouses in which there are no estate tax concerns would typically provide that the trust would simply continue for the use and benefit of the surviving spouse upon the death of the first spouse, and the surviving spouse would have the power to amend or revoke the trust.
Another alternative is commonly referred to as a “Disclaimer Trust”. A Disclaimer Trust would allow a surviving spouse to make a decision after the death of the first spouse to either accept a transfer of property outright (with the power to amend or revoke) or exercise the right of disclaimer to essentially create an A-B Trust. This would allow the surviving spouse to assess the tax consequences and make a decision at the time of the first death as opposed to being required to create the A-B Trust. It vests the surviving spouse with discretion to control the entire trust or disclaim a portion equal to the amount of the unified credit (and create a “B” trust) if necessary to maximize the estate tax credit in effect at the time of the first death.
In any case, whether a simple trust or a more complex trust is best suited for your needs, a trust can fulfill its primary objective, which is to avoid probate. Probate is a court-supervised procedure that can take anywhere from nine months to a year to complete, and usually is much more expensive than administration of a trust either at the death of the first spouse or of the second spouse.
If you haven’t reviewed your trust within the last year or two, now would be a good time to do so.