Married couples, is your AB trust still serving your needs, or has it outstayed its welcome? In this episode of Absolute Trust Talk, Kirsten Howe and associate attorney Jessica Colbert take a closer look at AB trusts, a once-standard estate planning tool. They discuss when an AB trust makes sense and when it might just add unnecessary complexity and cost. Tune in as they explain the key benefits of asset control after death, while also considering the downsides, such as tax filing requirements and maintenance expenses. Whether you’re revisiting an existing trust or planning for the future, this episode offers practical advice to help you make informed decisions.
Time-stamped Show Notes:
0:00 Introduction
1:07 What exactly is an AB Trust? We break it down here.
2:47 Understanding how an AB Trust works. You may have heard it called something else.
4:18 Why might a surviving spouse want control over the decedent’s trust? Here’s how AB Trusts make that possible.
5:35 The downsides of an AB Trust: from annual tax returns to high maintenance costs.
6:29 Could there be a simpler alternative? We discuss potential options.
Transcript:
Hello and welcome to Absolute Trust Talk. I am Kirsten Howe. I’m here with one of our associate attorneys, Jessica Colbert. This is our video podcast at Absolute Trust Counsel.
Today, we are discussing AB Trusts. This content and topic are very dense. We have a lot we could say about it, so we may end up recording more than one episode. So, hang on to your seats. This episode, by the way, is really for married people. If you’re single, you might find it interesting, but what we will discuss is irrelevant to your estate plan until you get married.
Today, we’re going to talk about what we call AB Trusts. It’s a very common estate planning technique that has, for many couples, really overstayed its welcome. Every month, we see these trusts coming in the door with a new client who doesn’t necessarily need one, doesn’t know they have one, or doesn’t know why. And when we explain it to them, they oftentimes don’t want an AB Trust.
We will start with the basics so everybody knows what we’re talking about. Most people who have a written estate plan in California have a trust. What we’re talking about here today can be done with a will as well, but we’re just going to talk about it in terms of a trust. It still applies, you can do it in a will, but most people have trusts, so that’s why we’re going to use that terminology.
The trust document for a married couple has to say, among many other things, what is supposed to happen when the first spouse dies. Most married couples leave something, if not everything, to their surviving spouse. But there are many different ways that you can leave something or everything to your spouse. That’s where this AB Trust comes in.
When you’re drafting your married couple trust, you have one—well, you have many decisions to make—but one critical decision is figuring out how to leave property to your surviving spouse. There are other decisions that have to be made once you make that decision, but that base decision is, “Do I want to control my spouse and what my spouse does with my property after I die?” With an AB Trust, you can allow your spouse to use your money after you die if they need it. But after your spouse dies, you get to control who gets it. Your spouse cannot change that. If you don’t set your trust up as an AB Trust, your spouse can do whatever they want with the property, including changing the estate plan after you die.
Jessica, talk to us about how that works exactly.
Yes. So, on the death of the first spouse, if you have an AB Trust, your singular trust will split into two separate trusts: the A trust and the B trust. It’ll be the survivor’s share and the deceased spouse’s share. The surviving spouse can change their surviving share trust. They can update it and change the beneficiaries, but they cannot change the deceased spouse’s share. In that way, there is control over what your spouse can do with your share.
The deceased spouse’s share becomes irrevocable. That’s why the survivor can’t change it.
And just as an aside—you may see in your own trust documents—typically you’ll see that term, “Survivor’s Trust,” but you may see a variety of terms for the deceased spouse’s trust. You might see it called a Bypass Trust. That’s what we call it in our office. Sometimes, it’s called Credit Shelter Trust. It could be called a Family Trust or a Decedent’s Trust… But whenever the trust says we have to split it into two, that’s what we’re talking about. We have come to call it, just informally, AB. I don’t know how that ever started, but I know there’s a mnemonic for that. The “A” stands for “above the ground,” and the “B” stands for “below the ground.” That’s very dark humor. Sorry about that.
Jessica, why would someone want to control what their spouse does with their property after they die?
There could be a variety of reasons. It may be a situation where there’s a blended family, and one spouse has—or both spouses have—children from previous relationships. You may be worried about the surviving spouse removing your children as beneficiaries. It may also be a concern that your spouse might be vulnerable to bad influence later down the road. There may be concerns about remarriage. You know, the Pilates instructor comes in and, you know, marries a hot young thing. There could be concerns about that.
Right, and we see this kind of concern in our practice a little more commonly as our clients get older. When our clients are young, and they’ve got young children or been married for only ten years, they’re not thinking about becoming vulnerable as elderly people. But our older clients may have some real-world experience around that, and they might think about that. So those definitely are valid reasons. But there is a trade-off.
Let’s talk about the negative aspects of having that AB structure.
Splitting the trust into two shares does cost money because it requires legal work to divide and retitle the assets. Also, the irrevocable trust, the deceased spouse’s share, becomes a taxpayer. So, the surviving spouse does have to file a tax return every year for that trust. Also, depending on what type of AB Trust you have, the assets in the irrevocable trust may not get a step up in cost basis on the surviving spouse’s death.
A lot of times, that’s an important consideration. Each of those things is an important consideration. The trade-off in control comes with complexity, which means expense.
Instead of having the AB, we could say, “I leave everything to my surviving spouse, and there’s no ongoing irrevocable trust.” That’s certainly simpler and easier for our surviving spouse.
What exactly are we talking about when we say simpler and more manageable?
It’s simpler and easier because it requires minimal legal work upon the first spouse’s death, and there are no additional tax returns that the surviving spouse will have to file each year. Then, the surviving spouse can change and update it as they wish.
Right, which is a plus for the survivor, but maybe the deceased spouse doesn’t like that. Even if a couple decides that they want the control that comes with this AB structure, that may not do it all for them. That might not be enough. We will talk about that particular aspect of these AB Trusts in our next episode.
I hope you got something out of this, and we look forward to connecting with you next time.
Resources Related to This Episode:
- Absolute Trust Talk Episode 128: Revocable or Irrevocable Trust: Which is Right for Me? https://absolutetrustcounsel.com/128-revocable-or-irrevocable-trust-which-is-right-for-me/
- Absolute Trust Talk Episode 105: AB Trusts: Do You Have One? If So, Do You Still Need One? https://absolutetrustcounsel.com/105-ab-trusts-do-you-have-one-if-so-do-you-still-need-one/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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