105: AB Trusts: Do You Have One? If So, Do You Still Need One?

Ever open a closet drawer only to discover something from your past that’s long since been rendered obsolete? More often than not, this obsolescence comes by virtue of outdated technology — or, in the case of clothing, because of a shift in what’s considered fashionable. Think VHS players, a Sony Walkman . . .  parachute pants.

While you probably wouldn’t expect to find any such relics within the realm of estate planning, they might just exist there too. If you’re married, an excellent case in point is the AB trust you’ve been holding onto for quite some time — maybe without even knowing it. And like those archaic electronic devices or that “of its time” fashion, it may be time to kick it to the curb.

At one time, AB Trusts were very common. They harnessed a specifically designed structure to minimize exposure to the California estate tax laws that included a surprisingly low exemption — as low as $1 million dollars. So, if a couple had a worth of $2 million and one spouse died, the remaining spouse was often saddled with a substantial estate tax liability.

But, in 2013, those estate tax laws changed dramatically. That exemption mentioned above was bumped up by a multiple of more than 12 times — meaning that it now shielded a far greater number of estates from estate tax liability and, for many couples, also rendered their AB Trust obsolete.

Are you one of these couples? Tune into the latest episode of Absolute Trust Talk to find out. Kirsten Howe and associate attorney, Madison Gunn, will take a close look at AB Trusts, including the reasons why they became such a “go-to” strategy for so many married couples, why this type of trust can be more trouble than they’re worth for some, and how they still offer specific protection that may make them invaluable for a few others.

In this episode, we’re going to discuss:

  • Why AB Trusts were often the perfect fit for married couples based on the estate tax laws in place about a decade ago.
  • How the AB Trust got its name — including Kirsten’s take on the trust’s naming origin.
  • The specific requirements of an AB Trust. These requirements entail a considerable amount of legal and accounting work at a certain point, and extra costs come with that.
  • The primary consideration that must be made to determine whether or not an AB Trust is still the best option for you.
  • Some scenarios that can play out in the absence of an AB trust. These scenarios may make an AB Trust your best option despite its requirements.
  • Why, if you haven’t updated your trust in the past decade, you should make an appointment with your trust attorney ASAP.

And more.

Despite those changes to California estate tax laws, many couples still retain an AB Trust that will profoundly impact how their estate is maintained in the event one spouse dies. It’s our goal for you to walk away with a clear understanding of this sometimes misunderstood — and potentially outdated — estate tax strategy.

Big Three from Episode #105:

  1. Because of their unique structure and stipulation that one trust will ultimately split into two separate trusts — a survivor’s trust and a decedent’s trust — AB Trusts were once a very efficient solution to minimize a couple’s estate tax exposure. Of course, the protections that AB Trusts offered came with additional costs that made its administration more expensive than other forms of trusts, but for many couples, their unique financial upside was well worth it.
  2. 2013 brought about some substantial changes to California’s estate tax code, making AB Trusts far less appealing to many couples. The most pivotal of these changes was a considerable increase in the exemption level before an estate was subject to taxation. Ultimately, the exemption was increased by a multiple of twelve. Also, a new benefit was conferred on that exemption: portability, which made it much easier for the surviving spouse to continue to shield the estate from taxation.
  3. In the absence of an AB Trust, the surviving spouse can change the original estate plan — even substantially — which may have a profound effect on who remains the beneficiary in the event of their death. We live in an age where blended families are far more common than ever before, and, because of the potential complexities of family dynamics, certain scenarios may only be avoided by keeping an AB Trust in place.

Time-stamped Show Notes:

0:00 Introduction

2:09 This distinction underscores the importance of having an actual trust vs. relying on a will to carry out your wishes.

2:31 A trust document features an essential requirement, but there are several ways it can be executed.

2:55 This major decision will have a profound effect on the structure of a couple’s trust.

3:18 Listen here to find out what an AB Trust actually does.

3:43 Wondering why it’s called an AB Trust? The basic idea is when a married couple has a joint trust, and it’s set up specifically as AB, then when one spouse dies, it will split into two trusts.

5:54 So, why would someone want to control what their spouse does with the property after they die? Like blended families, creditor protection, and more. Listen in as Kirsten and Madison discuss.

7:05 Creditor protection that an AB Trust offers may make it worthy of consideration for some couples because assets will bypass the surviving spouse in the case they may be sued, for example.

8:55 While some may feel that elder protection laws are enough to shield a surviving spouse from predation, recovering the estate is one thing those laws don’t do.

10:09 You might like AB Trust’s protections, but there are tradeoffs. Here are some of the cons.

11:50 Think that an AB Trust creates too much complexity? Here’s what happens in its absence.

14:05 Some couples with an AB trust didn’t even know they had one and wanted to get rid of it. They may have gotten it in the first place to help minimize estate taxes for the family.

15:14 In 2013, two significant changes to California’s estate tax law rendered AB Trusts less appealing than they once were.

15:39 Portability is one change that really underscores why those changes make AB Trusts somewhat obsolete from a taxation perspective. This allows the surviving spouse to use some of the exemption.

17:49 Today, we can effectively do the same thing we used to use AB Trusts for but without the extra irrevocable trust if appropriate.

18:13 As we’ve been discussing, the AB trust is right for some couples but not all, so how do you ensure it’s still right for you? Hint: You should REALLY talk to an attorney!

20:41 While an irrevocable trust is unchangeable in theory, there are exceptions. Here’s an example.

22:17 Going to court is much more expensive than not going to court, so if you haven’t updated your trust in 5 or 10 years, it’s time.

23:00 Can you petition to modify or eliminate the bypass trust once an AB Trust has been divided? Listen here.

24:31 Can you do a petition to modify many years after the first spouse dies? Yes, you can.

Resources/Links Mentioned in this Episode:

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