An A/B Trust is a type of Living Trust that is set up jointly by a married couple in order to (a) minimize taxes on either of the trusts and (b) lock the ability of one of the spouses to make changes at least as to the decedent’s amount of the trust.
AB Trust operates by automatically creating two trusts at the death of one of the spouses, Trust A (Surviving spouse half) and Trust B (Decedent’s spouse half).
AB Trusts have recently fallen out of favor because they don’t provide a clear tax benefit since the Federal tax exemption for couples has risen to $12,000,000 for individuals and $24,000,000. So, for the vast majority of citizens an A/B Trust created for this purpose will not be beneficial.
Furthermore, AB Trusts severely limit the ability of the surviving spouse into making any adjustments or changes to the trust itself. Specifically, the Trust itself can no longer be restated to update the terms, since one of the spouses has passed away. Changes to the Trust may be prohibited by the Trust language or severely limited.
Finally, there may be a plethora of confusion and accounting issues to try to account for community property and separate property and which part of which is now part of the surviving spouse’s trust, especially since properties and accounts may be physically impossible to separate out. This includes the fact that the surviving spouse as a trustee may need to create separate EIN, separate bank accounts, file separate taxes, which may impact the actual attempted tax savings in the first place.
It is therefore suggested to transition out of the A/B Trust by restating it during the lifetimes of both spouses into a standard probate avoidance or disclaimer trust. If there are potential control issues, the disclaimer trust may have additional custom language to provide for the beneficiaries and to limit the spouses ability to dispose of certain trust assets.
Recognizing the problem of administration and prevalence of A/B Trust issues, states have passed laws that permit the surviving spouse to “decant” the assets in the B trust and create a completely new trust, under certain conditions, which includes notice and confirmation by the beneficiaries listed in the trust documents.
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