Welcome back to Absolute Trust Talk! In this exciting episode, associate attorney Jessica Colbert steps into the spotlight for the first time, accompanied by managing attorney Kirsten Howe. Together, they continue the series AB Trusts: Do You Have One? Do You Need One? This episode uncovers the surprising reason many couples have AB trusts without realizing it, and what steps you should take if you find yourself in this situation. You’ll also learn why it might be time to reconsider an AB trust, especially if you are the surviving spouse and want to make changes. Don’t miss out on this crucial discussion!
Time-stamped Show Notes:
0:00 Introduction
0:57 Many couples have an AB Trust structure and don’t even know it. In this segment, we explore why this situation is so common.
2:11 Here are two reasons why you may no longer need an AB Trust structure.
2:54 Thinking about updating your trust? The first step is to talk to your attorney.
4:00 An AB Trust only becomes “irrevocable” once a spouse dies, so it’s important to make any changes now while you still can.
4:52 Is “irrevocable” truly unchangeable? Listen as we explore what “irrevocable” means in practice and the options available to modify the trust.
Transcript:
Hello, and welcome to Absolute Trust Talk. I am Jessica Colbert, an associate attorney at Absolute Trust Counsel. Today is a big day here at Absolute Trust Talk because I am leading today’s episode, and I am joined by our managing attorney, Kirsten Howe, who gets to take a little bit of a backseat today. This is the third episode in our series “AB Trusts: Do you have one? Do you need one?”
In our last two episodes, we’ve discussed what an AB trust is and why this structure is good for some families. If you missed those episodes or need a refresher, pause this, go back, and watch those.
In today’s episode, we’ll discuss couples who may have an AB trust and don’t want it or don’t even realize they have it. This structure might be right for some families but not for others.
So, Kirsten, why do we see so many new clients with this AB trust structure, and they usually don’t even realize that they have it until we tell them?
The thing that happened is that the law changed in 2013. Before that, the AB structure was the default for married couples. The estate tax exemption was very low in some of those years—down to, I think, $650,000 around the year 2000. So, $650,000 in 2000 was a lot of money, but not a huge amount. This was kind of what we did for married couples. This was the only way we could take advantage of both spouses’ estate tax exemptions. Many attorneys just did this as a matter of course, and they didn’t discuss it with their clients because it was the best thing for them.
Yes, but now there are two reasons that we don’t need this structure to accomplish that anymore. The first is that the exemption amount is currently very large. It’s currently $13.61 million per person. And also, we don’t need this structure to use both spouses’ exemption amounts anymore. We now have another method called “portability,” where the surviving spouse can file an estate tax return, claim their deceased spouse’s unused exemption amount, and they can add it to theirs. For those reasons, we don’t necessarily need the AB structure anymore.
So now, what should people do to ensure they have the right structure?
First and foremost, we’ll always say talk to your attorney. However, you can look at your trust document, especially if it was written before 2013. That’s a good indicator that you probably want to talk to your attorney and ensure this is right for you. I’m just going to say that the provisions in the trust that talk about the A and B trust structure are very legal. Clients might struggle to pick up their trust, read it, and figure out what they have. So, I would say, to be on the safe side, talk to your attorney, primarily if your trust was written before 2013.
That’s a good point. It can even be challenging for new attorneys to figure out how to read that language. That’s true. We’ve had a few conversations.
These are revocable trusts, which means that while you and your spouse are alive and have capacity, you are able to change them. And that’s a fairly straightforward update to your estate planning documents.
That’s right. The problem that we see, though, is when a client comes to us—a new client walks in the door whom we’ve never met before—and this client happens to be a widow or widower, and they’re a surviving spouse, and we have to tell them that they have an AB trust. Once the first spouse dies and we have this AB trust, that is irrevocable. We cannot change it. It’s irrevocable, and now, this surviving spouse is stuck with this AB structure.
But you and I both know that “irrevocable” doesn’t mean it cannot be changed ever under any circumstances—it’s just going to be harder. What we can do is a “petition to modify,” where we file a petition with the court asking them to modify the trust in a way that removes the requirement that the trust be divided into these two sub-trusts. We’ve had a lot of success with these petitions.
Yeah, it’s a fairly simple thing to do. When you hear the words “petition” and “probate court,” you probably are thinking about, “Oh, I know I’m supposed to avoid probate,” because that’s what we say all day, every day. This is different. This is not probate. This is not that year-and-a-half process that takes forever is so frustrating, and costs so much money. This is one petition, one hearing. We point out to the judge that we set this trust up way back in the day. Things have changed—that’s the key—and we don’t need it anymore. The probate judge—the probate court—is the court of equity, so their focus is on doing what’s right and best and fair, not on following the letter of the law, no matter what kind of distorted result we get. So, we’ve been able to do this for many clients.
I will say that this procedure is not for every family. Everyone in the family whose rights will be impacted by this procedure can object. I think you can extrapolate and imagine that in a blended family, where the surviving spouse has their own children and the deceased spouse has their own children, they might not all agree to this modification because it would impact the family of the deceased spouse. So, we have to take a careful look at that before jumping in and filing petitions.
That’s a good point. It’s better not to rely on this as a way to fix it. It’s better to address and ensure you have the right trust structure while alive and have capacity rather than rely on this backup petition to clean up the mess.
While you’re alive, you don’t need anyone else’s consent. You can go ahead—it’s your trust, revocable—change it and do whatever you want. But once that first spouse dies, without everyone else’s consent, you’re not going to get what you want.
All right, Jessica, you did a great job. Thank you. Not bad for your first time. You did a great job, period. Thank you so much. It was fun to sit back and just say whatever came to mind and be the guest. I hope you all enjoyed it, and I hope you got something out of it. We very much look forward to connecting with you next time.
Resources Related to This Episode:
- Absolute Trust Talk Episode 152: The Truth About AB Trusts: Will Your Wishes Be Followed? https://absolutetrustcounsel.com/152-the-truth-about-ab-trusts-will-your-wishes-be-followed/
- Absolute Trust Talk Episode 151: Is an AB Trust Right for You? Essential Insights for Married Couples https://absolutetrustcounsel.com/151-is-an-ab-trust-right-for-you-essential-insights-for-married-couples/
- 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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