by Jack D. Brown, Esq.
A-B Trusts. The Unified Estate Tax Credit, adjusted for inflation, is presently $5,340,000 (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 a husband and wife 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 (2) separate shares designated the “A Trust” and the “B Trust”. The B Trust would be an amount 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 distribution of principal would be limited, and the surviving spouse could not amend or revoke the “B Trust”.
In that the Unified Credit is presently $5,340,000 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 these provisions. Amending your trust to delete the A-B provisions because they may no longer be necessary would result in substantially less administrative costs upon the death of the first spouse to die, and would allow the surviving spouse to amend the trust as may be necessary due to changed circumstances.
Alternative Measures – Disclaimer Trust. In estates exceeding $5,340,000, however, consideration will need to be given to whether or not a portion of the trust assets shall be allocated to a Disclaimer Trust or a Qualified Marital Deduction Trust. Additionally, filing a federal estate tax return may be necessary in order to preserve the portability option. The purpose of a “Disclaimer Trust” is to allow a surviving spouse to make a decision after the first death to either accept a transfer of property outright (with the power to amend or revoke) or exercise the disclaimer to essentially create the equivalent of an A-B Trust, as discussed above. 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 provisions. It vests the surviving spouse with discretion to control the entire trust or disclaim a portion in order to assure the availability of portability and to utilize the entire Unified Credit of both spouses, which can effectively eliminate estate tax (under current law) of a combined estate of $10,680,000.
Practical Considerations. There are also several practical considerations that may determine whether or not your trust needs to be reviewed. A trust reflects your situation at the time it is drafted and although a properly drafted trust will attempt to address future contingencies, there are numerous life-changing events that may necessitate a review of your estate including:
- Recent inheritance
- Change in financial circumstances
- Started a business
- Have a family trust drafted in another state
- Retirement
- Death of a beneficiary
- Birth of a child or grandchild
- New son-in-law or daughter-in-law
- Trustees name change
Substantial changes have been made in estate tax law in the last few years. If you haven’t had your trust reviewed in a while, it may be a good idea.
The Law Office of Jack D. Brown, APC is located at 41391 Kalmia Street, Suite 210, in Murrieta. www.jackdbrown.com (951) 698-0050
