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.\u00a0 This is known as an A\/B split. These trusts allow married couples to divert the surviving spouse\u2019s share of the community property and his\/her separate property into Trust A, sometimes called the Survivor\u2019s Trust. Trust B, sometimes called the Bypass Trust, holds the decedent\u2019s share of the community property and his\/her separate property.\u00a0 Sometimes living trusts also include a Trust C, often referred to as a \u201cMarital Deduction Trust,\u201d which would hold any overflow amount of the decedent\u2019s share above the exemption amount.<\/p>\n

Upon the death of the first spouse, Trusts A and C will be subject to any estate tax if the deceased spouse\u2019s exemption amount is used up completely by the assets in Trust B.\u00a0 Trusts B and C typically become irrevocable and as a result.\u00a0 Once deceased spouse\u2019s portion of the estate is irrevocable, these trusts will have to begin filing its own income tax returns.\u00a0 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.<\/p>\n

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.\u00a0 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.\u00a0 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.<\/p>\n

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.\u00a0 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.<\/p>\n