If you are married and sought the counsel of an estate planning attorney several years back, chances are your estate plan contains an “AB Trust.” Unless you are well-versed in estate planning, the likelihood of you remembering terms like AB Trust is slim. An AB Trust is a specific type of planning available to married couples. An AB Trust was often a recommended strategy to help minimize estate taxes on the death of the first spouse to die. Specifically, a joint revocable trust with AB Trust provisions is designed to divide into two or more trusts upon the death of the first spouse to die.
Following the death of the first spouse to die, a Bypass Trust (this is where the “B” comes from) would be established to protect the available estate tax exemption of the deceased spouse. Without a ByPass Trust, the unused exclusion amount of the deceased spouse would be lost forever. Recent changes to the Estate Tax law, however, have made traditional AB Trust planning less appealing for many married couples.
One reason AB Trust planning is becoming less of a must, and more of a fuss, is because there are much higher exemption amounts available. In addition, there is something called “portability”. In 2016 the federal tax exemption available to an individual was $5.45 million. This means any U.S. citizen or permanent resident could leave this amount to his or her heirs without paying any estate tax. This exemption amount increases annually to adjust for inflation. Portability allows the surviving spouse to “port over” and use any remaining estate tax exemption of the deceased spouse. This means that wealthy couples could leave a total of $10.9 million to their heirs without being taxed. If the law stays as it is currently, this number that will continue to rise in future years to keep up with inflation.
If you created an AB Trust before these recent law changes, you may assume there is nothing wrong with leaving the trust in place. Unfortunately, leaving AB Trusts in place when they are not needed can be disadvantageous. To reiterate how AB Trust planning works, when one spouse passes away, the trust splits into two trusts: Trust A and Trust B. The B trusts are irrevocable, so the living spouse has no ability to modify its terms. The biggest problem is that assets sent into the ByPass Trust will not receive a step-up in basis on the death of the second spouse to die. This can create a less-than-ideal tax outcome for the beneficiaries if there is no estate tax to consider.
With that being said, there are other reasons why a couple may want an AB Trust structure. A ByPass Trust can help protect assets from second marriage situations and provide a considerable degree of asset protection for the surviving spouse. With that being said, if you had your trust established 10 or more years ago, you should have it reviewed by a qualified estate planning attorney to ensure that it is drafted in such a way to maximize the benefits to both the surviving spouse, as well as the remainder beneficiaries.