The A/B trust has been used in the past to avoid or reduce estate taxes. They were very popular in the 80s and 90s, when the exemption for estate taxes was $600,000. In 2008, however, the exemption is $2 million, and it will be $3.5 million in 2009. If your estate is under these numbers, then you do not need an A/B type trust any more; however, you still need a trust, specifically a Disclaimer trust. This type of trust is also appropriate even if your estate is larger than the current exemption amount.
There are significant disadvantages to the A/B trust:
· Upon the death of the first spouse, the surviving spouse must hire an attorney or accountant to perform a detailed analysis of the estate assets and to divide and allocated those assets into two subtrusts.
· The surviving spouse must obtain a tax id number from the IRS for the B trust, and each year must file two separate income tax returns, one for the A trust, and the other for the B trust. Separate records must be kept for each trust.
· Although all the assets in both trusts get a stepped up basis on the first spouse’s death, only the assets in the A trust get another step up on the second spouse’s death. The assets in the B trust retain their basis as of the date of the death of the first spouse, even after the second spouse dies.
· The B trust is irrevocable, which means that the surviving spouse cannot change the trust after the first spouse’s death (some couples desire this, but most do not).
The advantages of the Disclaimer Trust are as follows:
· It is much simpler and less expensive to administer after the death of the first spouse, since it doesn’t have to divide into two shares. Therefore, two separate tax returns are not required, and neither is any separate bookkeeping.
· All of the assets get a full step up in basis at the first and second death.
· The trust is very flexible, such that if the estate is larger than the amount exempt from tax, then a separate trust can be created (by the surviving spouse “disclaiming” assets into the new subtrust, and thus minimize estate taxes, if needed. But if not needed, we don’t use the disclaimer provisions.
The Disclaimer Trust can only be used my married couples. If you would like to consider changing from an A/B trust to a Disclaimer Trust, give me a call.
