It is common to encounter A/B Trusts created for married couples before the year 2010.
Back in the day the A/B Trust was primarily established to avoid the tax impact of exceeding the then much lower Estate Tax limit.
The mechanics of an A/B trust involves setting up so called reciprocal “lockboxes”, first coming into effect when the first spouse passes.
At the time of the first death, the Trust estate (assuming all community property) gets divided 50-50 , with one-half transferred into the deceased spouse’s “Bypasss Trust” and the other half into the surviving Spouse’s “Survivor’s Trust”.
Once the first spouse passes, the surviving Spouse will only be able to modify or dispose of the A/B trust mechanism with a Court Order, as the so called “lockbox” becomes irrevocable.
In the year 2018 each spouse has an Estate Tax credit of eleven million dollars ($11,000,000.00). Thus, the A/B Trust is no longer a required tax planning mechanism for the vast majority of U.S. taxpayers.
Other overlooked implications of the A/B Trust are that illiquid assets, e.g. real estate, at the time of death, have to be divided into two (2) shares, the Survivor’s Trust and the Bypass Trust. This could be impracticable and contrary to long term estate planning goals.
If a married couple has a strong and straight forward relationship, where the goal is to simply leave everything to the Surviving Spouse, then it is strongly advised to have an Estate Planning attorney review the Trust documents, and if indicated, update it to a Non-Formula Trust.
If you are unsure if you have an A/B Trust or want to update to a Non-Formula Trust, please contact the Law Offices of Hanlen J. Chang located in San Francisco and Palo Alto.