DO YOU NEED TO UPDATE YOUR TRUST?

You bit the bullet years ago and finally have an estate plan in place. At the centerpiece of your plan is a revocable living trust. When you die, your assets will be in your living trust and your successor trustee will distribute your property pursuant to the terms of your trust. Hooray! Your heirs will likely not have to deal with the expensive and time-consuming probate process in California.

It may be time, however, to update that plan because of changes in the law. Previously, many clients were advised to utilize an "A/B Trust" in order to maximize the amount of money that could pass estate tax free to heirs. However, recent changes in the law may diminish or even eliminate the need for an A/B Trust.

WHAT WAS THE PRIMARY PURPOSE OF AN A/B TRUST?

Prior to a recent change in the law, if a married couple left all of their property to their spouse outright, they would waste one of the spouse's credit exemptions. A credit exemption is simply the amount of money and property that can be passed to others without incurring estate tax. For a long time, the credit exemption amount was about 1 million dollars and, if not used at the first spouse's death, that spouse's exemption amount was wasted. Estate planners encouraged the use of an A/B Trust so that both spouse's exemption amounts were utilized and the amount of money that could be passed estate tax free was doubled. (For a more detailed explanation with a case example see IS AN A/B TRUST STILL NECESSARY AND ADVISABLE?)

HOW HAS THE LAW CHANGED?

In 2016, the credit exemption amount has been increased to 5.45 million. Obviously, a lot of estates will not be subject to estate tax as result. Further, "portability" was introduced. Portability allows the first spouse to die to transfer any unused credit exemption amount to the surviving spouse without the need for an A/B Trust. With portability, a married couple can now pass 10.9 million dollars to heirs without incurring estate tax and without the use of an A/B Trust.

SHOULD YOU AMEND YOUR TRUST TO ELIMINATE THE A/B STRUCTURE?

With the increase in the credit exemption amount and the introduction of portability, many couples may not need the A/B Trust structure anymore. Further, an A/B Trust also is more difficult to administer than a simple trust because of the need to allocate assets and file separate tax returns for the two trusts. Also, in a simple trust, assets passed directly to the surviving spouse receive a second step-up in basis for capital gains purposes on the second death. (One of the drawbacks of the bypass trust is that although estate taxes can be reduced, any assets put in the bypass do not receive a step up in basis on the second spouse's death.) All of these factors weigh in favor of eliminating the A/B Trust for many couples.

ARE THEIR DISADVANTAGES TO ELIMINATING THE A/B TRUST STRUCTURE?

There can be disadvantages to eliminating the A/B Trust structure. If all property goes outright to the surviving spouse, he or she can change the ultimate beneficiaries of the estate because there is no obligation to fund an irrevocable trust on the first spouse's death. In addition, because a bypass trust is irrevocable, all assets placed in the trust are protected from most of the survivor's creditors. If instead the property is passed outright to the survivor, all of the assets are available to pay creditors.

HOW DO YOU KNOW WHETHER AN A/B TRUST IS STILL RIGHT FOR YOU?

In order to make an informed decision regarding what structure is best for you, you need to seek the counsel of an informed estate planning lawyer. At Finlay Law Group, you will have access to a knowledgeable, caring, estate planning attorney who can assess your situation and advise you appropriately. Contact us today to see if your trust could use updating in light of the change in the tax laws.