Revocable living trusts enable one to avoid probate, resulting in greater privacy as well as decreased legal fees and costs. If structured properly, revocable living trusts also provide other benefits. To achieve these benefits, the client should execute an “A-B trust”.
What is an A-B trust? Let us use a married couple to illustrate. In basic trust planning, one of two things happens when the first spouse dies: either the assets remain in trust for the surviving spouse or the assets are distributed outright to the surviving spouse. By contrast, with an A-B trust, we split the assets into two separate and distinct trusts upon the death of the first spouse to die. The “A” trust is a marital trust; it benefits only the surviving spouse, and the surviving spouse has full control over the assets. The “B” trust, sometimes called the bypass trust or the family trust, likewise benefits the surviving spouse; however, it can also have other beneficiaries such as children or grandchildren. Distributions from the bypass trust are limited, and it is irrevocable. For most of my clients, an A-B trust is at least worth considering. Here are three reasons why:
- Estate tax reduction – In 2016, the federal state exemption is $5.45 million. Thus, only a small percentage of estates will be subject to federal tax. However, it is difficult to predict how and whether the law will change in the future. A-B trusts allow married couples to fully utilize the federal estate tax exemption of both spouses, no matter what that exemption may be.
- Remarriage protection – Many clients worry that their spouse will remarry after they pass away and that an inheritance will end up in the hands of their spouse’s new husband or wife or stepchildren. A-B trusts can mitigate this concern. Because distributions from the bypass trust (or “B” trust) are restricted and the bypass trust is irrevocable, clients can rest assured that the assets in the bypass trust will ultimately pass to their children.
- Creditor protection – Assets placed into a bypass trust are protected from creditors and the holders of lawsuit judgments.
Estate tax reduction, remarriage protection and creditor protection: these are a few reasons to consider A-B trust planning. If you are setting up your estate plan, ask your attorney if an A-B trust is right for you.