Estate Planning Laws Change: Do I still need an A/B/C trust?
For most people, thinking about their estate plan is over after the signing appointment with the lawyer. The trust is put on a shelf or locked in a safe and not reviewed again. Most people don’t look at their documents until they are needed. However, estate planning laws, including the federal estate tax exemption, change often. Having a lawyer look at your documents every 5 years is the only way for you to keep your trust current. If a life event such as marriage, retirement, divorce or expanding your family happens between reviews, you should see your attorney right away.
There have been significant to the laws in the past 5 years. In 2012, congress enacted the American Taxpayer Relief Act of 2012 (the “Act”). The most relevant changes in the law that impact the average living trust include:
- Five-million-dollar lifetime gifting/estate tax exemption. In 2012, the exemption amount was set to return to a $1 Million exemption. A negotiation, however, resulted in retention of the full $5 Million exemption and is raised for inflation on a regular basis. Today the gift tax and estate exemption are a unified credit in the amount of $5.4 Million.
- Portability. Portability allows a surviving spouse, subject to some limitations, to make use of the estate tax exemption not used by the predeceased spouse. This has the effect of allowing married couples to have a combined exemption amount of $10.9 Million in 2016 with the flexibility of not having to have an over-complicated estate plan to take advantage of it.
Prior to the Act, estate planners designed living trusts so that they split into two, sometimes three sub-trusts upon the death of the first spouse. This is known as an A/B split. These trusts allow married couples to divert the surviving spouse’s share of the community property and his/her separate property into Trust A, sometimes called the Survivor’s Trust. Trust B, sometimes called the Bypass Trust, holds the decedent’s share of the community property and his/her separate property. Sometimes living trusts also include a Trust C, often referred to as a “Marital Deduction Trust,” which would hold any overflow amount of the decedent’s share above the exemption amount.
Upon the death of the first spouse, Trusts A and C will be subject to any estate tax if the deceased spouse’s exemption amount is used up completely by the assets in Trust B. Trusts B and C typically become irrevocable and as a result. Once deceased spouse’s portion of the estate is irrevocable, these trusts will have to begin filing its own income tax returns. There are also usually a lot of restrictions about how much access the surviving spouse has to the assets in Trust B and if they need consent of the beneficiaries.
Older trusts contain mandatory language that will force a surviving spouse to do the split between the A trust and B trust upon the death of the first spouse. This can have the unintended consequence of forcing a surviving spouse to put half his or her house in Trust A and half the house in Trust B. Later, if that spouse chooses to sell the house, potentially half of the proceeds from the sale may be unavailable to him or her because they are tied up in the B trust. Given that the exemption amount is so high and that now we have portability, a forced split is unnecessary for most couples.
Newer trusts are now written with provisions to make that split optional so that a surviving spouse is never forced to split the trust, but should the law change, provisions are there to accommodate a split. Even if you were unable to make the change to an optional split prior to the death of a spouse, there is potentially a court process you can go through that gives you permission to forgo a required A/B split.
If you are concerned that your trust might force you to make an A/B split, or if you are the surviving spouse and did no administration upon the death of your loved one, it is important to discuss with an attorney. At the Law Offices of Lisa C. Bryant, we review living trusts at no cost and can discuss with you a strategy going forward should you find yourself dealing with a required A/B split.
All materials have been prepared for general information purposes only to permit you to learn more about our firm, our services, and the experience of our attorneys. The information presented is not legal advice, is not to be acted on as such, and may be subject to change without notice.