How an A/B Trust works

Dear Len & Rosie,

We have a trust dated 1997, which is an A/B trust. We had it reviewed and were told that the laws have changed. We were under the assumption that the way an A/B trust works is then when the husband dies all our assets go to the wife, or if the wife dies all the assets go to the husband.  We are now being told the way it works is that if one of us dies the A or B portion stays in the trust.

Carl

Dear Carl,

The most critical reason why people should hire experienced trusts and estates lawyers for their estate planning is that it’s the only way you can make sure that you understand what you’re getting into. Yes the laws have changed from 1997, but the law has not changed the way your trust works. From what you wrote, we don’t believe you understand how your trust works.

An A/B trust is designed to help reduce or eliminate the amount of federal estate tax due upon the death of the surviving spouse. The way it works is that when one spouse dies, the surviving spouse does not inherit everything outright the way you thought. Instead, the trust is divided up. The surviving spouse’s half of the community property and his or her separate property is held within the A trust, usually named the “Survivor’s Trust”. The dead spouse’s assets, up to the estate tax limit in the year of the first death ($600,000 for 1997) is held in the B trust, which can be referred to under many different names, such as “Exemption Trust”, “Bypass Trust” and “Credit Shelter Trust”. If the dead spouse has assets in excess of the estate tax limit, they either go to the A trust, or sometimes into a C trust referred to as a “QTIP” or Qualified Terminable Interest Property Trust.

After the split is completed, the survivor really owns only the A trust. The B trust is completely irrevocable, as is the C trust if there is one. The surviving spouse is usually in charge of all three trusts, and gets all the income earned by the B and C trusts but cannot change who inherits the B and C trusts when her or she dies. The tax benefit to an A/B trust comes after the surviving spouse’s death when the B trust will pass free to your chosen beneficiaries free of any estate tax liability.

But that was 1997. In 2018, up to $11,200,000 is exempted from the federal estate tax. Furthermore, if the surviving spouse of a married couple is a United States citizen, he or she can take the deceased spouse’s exemption as well, protecting up to $22,400,000 from the estate tax.

What this means to you is that you probably no longer want an A/B trust unless you want to prevent the surviving spouse from being in control of everything. You should consider restating your trust (amending it in full) so that when one of you passes the survivor will own everything and won’t be answerable to the children or other named beneficiaries.

Doing so will also make your trust much less expensive to administer after the first death, as the survivor won’t have to split the trust and won’t need to file an annual income tax return for the B trust. Updating your trust now will make it a lot easier to handle in the long run.


Len & Rosie

Should you put your home into joint tenancy?

Dear Len & Rosie,

I am looking for a form to create a joint tenancy. I wish to transfer my home to joint tenancy between me and my mother. I want to avoid probate if I should pass away.  I am 34, and my mother is in her 60’s.

Josh

Dear Josh,

There are a number of places where you can find blank deed forms to put your home into joint tenancy with your mother. Many office supply and stationary stores have such forms. You can also find deed forms on the internet. If you find a form, make sure that the form you buy or download is specific to California. Each state has its own requirements concerning the preparation and recording of deeds, and a form specific to, say, Maryland, full of hoary language such as “whereas and wherefor” and “the party of the second part,” isn’t going to do you much good.

But finding a good form is only part of the struggle. You have to fill out a Preliminary Change of Ownership Report and submit it to the County Recorder with your deed so that the County Assessor can confirm that the transfer will not result in a property tax reassessment under Proposition 13 (It won’t, but they need the form anyway). And every county has its own rules and procedures related to Documentary Transfer Tax.

What it all comes down to is that you’re better off not doing this yourself, but if you’re willing to invest in the learning process, you can figure it out.

But do you really want to do this at all? We think it’s a bad idea. It’s one thing if your mother is buying the home with you. Then it’s only fair that her interests be protected by her being on title. But if you put the home into joint tenancy and change your mind later, your mother may refuse to sign the property back over to you. Or she could even be incapacitated and incapable of doing so. Or she may give her half of the home to someone else.

There are two better alternatives. You could create a revocable trust that leaves the home to your mother or to someone else you specify if she passes away before you, which is fairly likely. A less expensive alternative would be for you to prepare and record a Revocable Transfer on Deed (TOD) Deed.  Forms for this are available on line, or you could even look up California Probate Code section 5642 and type it up yourself.  The advantage of a TOD deed is that your mother wouldn’t own an interest in your home until your death, and you can borrow against the home, sell it, or leave it to someone else without your mother’s signature or consent.

Len & Rosie