Frequently Asked Questions
Contesting an A-B Trust
Q: My father had an A-B Trust with my stepmother in a blended family. The Trust provided equal shares among the four children, me and my sister and two stepbrothers, on the death of both parents. Our dad died last year and my stepmother had the Trust amended to leave all of her Trust A to her two children. Also, she amended my dad’s Trust B leaving my sister and myself only a fraction of the estate. We are complete confused and are considering a contest. We thought an A-B Trust could not be changed after the death of the first spouse. Should we contest?
A: First of all, I empathize with your situation as it happens all too often. The question of whether you should contest depends on the Trust provisions. I wrote an article on these issues years ago called the “Hidden Trust Powers” regarding Powers of Appointment.
Evidently, your stepmother had a General Power of Appointment in her Survivor’s Trust A which allows her to appoint the assets in Trust A to anyone she wants. Rather than the two Trusts, A and B, merging on her death to leave four equal shares to the four children, she appointed all of her Trust A to her two children. Unless otherwise restricted, the Surviving Spouse may leave Trust A to whomever she desires.
Unfortunately, she also had a Limited Power of Appointment over Trust B, your deceased dad’s Trust, allowing her to change the percentages of distribution. As a result, her children will receive more of your dad’s estate than you and your sister.
We should review the Trust closely to see if those provisions validly exist. If they are valid, her action was perfectly legal. As indicated in my article, these hidden powers can completely undermine the distribution perception of the creators of the Trust.
Safeguards in a Blended Family
Q: I am entering a second marriage and there is a blended family of my three children and my fiancée’s two children. Are there safeguards so we can include in our Trust to prevent the Surviving Spouse from changing the distributions to our beneficiaries?
A: Yes, there are several alternatives we can use to protect your distributions.
- Separate Trusts: We can arrange a Trust for each of you which you can fund with your separate property. Regarding community property, we can transfer one-half to each Trust. This is somewhat cumbersome but if each of you have significant separate property, it may be the preferable way to go.
- Simple Married Trust with Restrictions: We could create a less costly Trust if there is minimal separate property. This Trust could provide that the distribution provisions would become unamendable and irrevocable on the death of the first spouse. Other restrictive provisions would be implemented to prevent certain access to funds by the Surviving Spouse.
- An A-B Trust: This particular A-B Trust would be tailored to the death of each spouse with no Powers of Appointment provided. The B Trust, the Trust of the first deceased spouse, would be unamendable and irrevocable with reduced access by the Surviving Spouse. The A Trust may be totally amendable by the Surviving Spouse with absolute access. Each Trust would be tailored for distribution for each family. This alternative would be viable for larger estates.
Converting Existing Trusts
Q: Can we convert our existing Trust to a simple married Trust or an A-B Trust without refunding the Trust with our assets?
A: Absolutely, we can restate your Trust in its entirety using the same name of Trust and date.
Estate Tax
Q: You have indicated that you draft flexible Trusts to address Federal Estate Tax. Can you explain, and what is the Estate Tax in California?
A: First of all, there is no Estate Tax in California. As regards to the Federal Estate Tax, I prepare an A-B Flex Trust for this purpose. Basically, it allows the Surviving Spouse an option to divide the Trust into A and B Trusts on the death of the first spouse, or continue it as a Survivor’s Trust only. That will depend on the amount of the exemption allowed by law when the first spouse dies. The obvious advantage is that it allows us the flexibility of dividing the Trust, or not, so as to continue the Trust solely for the Surviving Spouse without accounting and avoiding an additional tax return for Trust B.
If you would like more information on any of the issues raised in this article, please contact Stephens Law Group at jes@jackstephens or call (858) 792-0909 for a consultation.
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Blessings,
Jack E. Stephens, J.D., LL.M