If My Spouse & I Set Up a Trust Years Ago To Avoid Estate Taxes, Should We Revisit That?

Yes, you should.  Many people who established trusts before 2010 have what is called an “A/B Trust” and they do not realize they want to switch to more flexible revocable trust that is less cumbersome on the suriving spouse to adminster.  A/B trusts require the surviving spouse to split the trust into two when first spouse dies and makes the first spouse’s beneficiary elections irrevocable upon his or her death.  Often times, surviving spouses wish to use what they thought were their funds until they died to provide for grandchildren not previously named in the A/B Trust or to adjust for life changes like a child becoming disabled or unable to manage money well for themselves.  With a joint revocable trust that does not contain an A/B provision, the surviving spouse maintains control of the entire trust until he or she passes.  This type of revocable trust is much easier to administer.

Below is a chart that helps clarify why A/B Trusts were so popluar with estate planning attorneys in the 1990s through 2009.  The estate tax exemption is the amount that is exempted from the death tax.  It’s the amount you can pass on to your beneficiaries before they have to pay taxes on your estate.  The exemption amounts were much lower in years past.

Year         Exempt Amount          Top Estate Tax Rate

2001         $675,000                     55%

2002         $1 million                     50%

2003         $1 million                     49%

2004         $1.5 million                  48%

2005         $1.5 million                  47%

2006         $2 million                     46%

2007         $2 million                     45%

2008         $2 million                     45%

2009         $3.5 million                  45%

2010         No estate tax               No tax

2011         $5 million                     35%

2012         $5.1 million                  35%

2013         $5.2 million                  40%

2014         $5.3 million                  40%

A/B trusts were meant to “lock in” the estate tax exemption of the first spouse to pass away.  Without an A/B trust, the deceased spouse’s exemption amout would be lost and the surviving spouse would be left with only exemption.  This was particularly important when the value of many couple’s estates exceeded the estate tax exemption.  At that time, A/B trusts served an important tax-saving function.  This has changed, however, both because the estate tax exemption is now so much higher but also because a surviving spouse can claim a deceased spouse’s estate tax exemption amount for assets they jointly shared as long as he or she files an estate tax return within 9 months of the first spouse dying and claims the “portability election.”  With portability, the surviving spouse now makes an affirmative election to “claim” the deceased spouse’s estate tax exemption as his or her own, thereby avoiding paying the estate tax for estates less than $5.3 million, by filing an IRS 706 return within nine months of the first spouse’s date of death.  So A/B trusts by themselves no longer achieve this objective as they did in the past.  Therefore, if you were motivated to choose an A/B Trust in the past primarily to avoid estate tax, you should reconsider this and update your estate plan to a more flexible, less cumbersome joint trust.  However, if you chose an A/B Trust in the past for non-tax reasons, such as having blended families where each spouse has children from a different marriage, you may not want to amend your trust.  Sometimes the main purpose for an A/B trust is to ensure that the surviving spouse cannot change beneficiary elections after the first spouse dies.  An A/B trust is still useful for requiring that one-half of a joint estate to go to the deceased spouse’s beneficiaries.  An A/B trust can be costly to maintain for many years after the death of a surviving spouse but if the primary concern is fairness as determined by one spouse alone as to beneficiaries, who may be the first to die, then maintaining an A/B trust could be worth it.