Why should clients continue with an A-B Trust division of assets after the Congress has continued with the $5 million exemption from federal estate tax (FET)?

For one reason, the law can change. Permanency means nothing to Congress. When Congress is in session, nobody’s safe. Another consideration is that California could resurrect her own version of estate tax. Given the state of economic affairs, this is certainly a concern.

However, there are other more convincing arguments which can be made for the utilization of the A-B Trust.

1. A Blended Family

If there is no division of assets on the death of the first spouse, everything normally goes to the surviving spouse. Is that what the spouses wish to happen if each has children by a prior marriage? If so, no problem then. However, if each spouse wishes to benefit their own children with their interest in the community property estate, an A-B Trust should be utilized. The decedent spouse’s Trust B can provide income and other benefits to the surviving spouse then subsequently be distributed to the children on the death of the surviving spouse.

2. Asset Protection

If the surviving spouse becomes involved in any legal proceedings or has any long term, catastrophic health issues, the B Trust could provide for protection of the funded assets to avoid total loss of the Trust estate.

To provide for this protection, special arrangements must be provided in the Trust B provisions. For example, there should be no provision for access to Trust B principal. This can be strictly denied (without limitations) or included as a conditional distribution. Trust B could provide access to principal to the surviving spouse on the condition that he/she is not involved in any legal claims or proceedings or be diagnosed with a catastrophic illness such as Alzheimers, Multiple Sclerosis (MS) or Parkinsons. Once this occurs, the surviving spouse would have no more accessibility to Trust B principal. Alternatively, Trust B could deny access to principal from the outset.

The intricacies of Trust B should be discussed in detail so that the spouses can fully understand the impact and ramifications of the provisions. There are numerous alternatives, especially if there are conditional distributions of principal, that should be explored and verbally amplified.

For those of you who have A-B Trusts, amendment thereto should be seriously considered for these purposes. For spouses considering a Trust, an A-B arrangement is recommended for the purposes and objectives indicated in this article.