What you should know about an A/B Trust

Dear Len & Rosie,

We have a living trust that we created twenty years ago. I believe the trust is called an “A/B Living Trust.” Over the last ten years we have kept all assets in the trust.  The company that created the trust has called and said that it is a good idea to restate the trust especially because it is an A/B trust. Of course they want us to pay for it. Is it really necessary to restate the trust given that we haven’t changed our beneficiaries, or our assets?

Christine

Dear Christine,

The way your A/B trust works is that upon the death of the first of you to die, the trust is divided into two or sometimes three subtrusts. The B trust, frequently called the “Bypass” or “Exemption” or “Decedent’s” trust is an irrevocable trust funded with the portion of the deceased spouse’s assets that pass free of federal estate tax. The surviving spouse usually gets all of the income of the B trust, and may dip into the principal of the B trust if the A trust assets and assets outside the trust are insufficient to pay for the surviving spouse’s needs.

Think of it this way: The A trust is for the Above Ground Spouse and the B trust is for the Below Ground Spouse. It sounds dumb but you won’t forget it.

The gift and estate tax exemption amount for 2017 is $5,490,000 and is indexed to inflation. Furthermore, when a married spouse dies, the survivor can add whatever is left of the dead spouse’s exemption to his or her own.

To change your trust, it’s easier to amend your trust by “restating” the entire trust document with an ordinary trust document that does not require an A/B split upon the first death. Doing a restatement also has the added benefit of bringing the entire document up to date with other changes in the law.  It’s better than creating a new trust as you won’t have to transfer your home and other assets from the old trust to the new one.

You may want to keep the A/B trust the way it is if you and your husband want to restrict the ability of the surviving spouse to change things. This can be very important in blended families with children from prior marriages because while most spouses want to leave everything to one another, they still want their children to inherit it all in the end. 

Len & Rosie